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 September 26, 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 September 26, 1999 was 21,420,812.
================================================================================
This document consists of 23 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 -
September 26, 1999 and March 31, 1999 3
Condensed Consolidated Statements of
Operations - Quarter and Six Months ended
September 26, 1999 and September 27, 1998 4
Condensed Consolidated Statements of
Comprehensive Income (Loss) - Quarter and
Six Months ended September 26, 1999 and
September 27, 1998 5
Condensed Consolidated Statements of Cash
Flows - Six Months ended September 26,
1999 and September 27, 1998 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
<PAGE>
Item 1.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
Sept. 26, March 31,
1999 1999
--------- ---------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents,
$9,983 restricted as collateral for line of credit at Sept. 26 $ 49,469 $ 13,720
Temporary cash investments 98,386 140,843
Accounts receivable,
net of allowances of $5,066 at Sept. 26 and $3,375 at March 31 53,042 46,381
Inventories 16,494 19,193
Deferred income taxes 9,009 5,510
Prepaid expenses and other assets 6,333 6,834
--------- ---------
Total current assets 232,733 232,481
Property and equipment, net 48,569 55,877
Software production costs, net 6,022 6,129
Deferred income taxes 9,053 9,053
Other assets 9,188 9,572
--------- ---------
$ 305,565 $ 313,112
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,085 $ 11,755
Accrued liabilities 48,253 43,638
--------- ---------
Total current liabilities 55,338 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: 21,420,812 shares at Sept. 26
and 21,509,000 shares at March 31 214 215
Additional paid-in capital 180,317 180,596
Treasury stock (5,736) (4,853)
Accumulative other comprehensive income (loss) (970) 5,921
Retained earnings 51,696 51,134
--------- ---------
Total stockholders' equity 225,521 233,013
--------- ---------
$ 305,565 $ 313,112
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------ -------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 36,050 $ 46,813 $ 69,074 $ 92,475
Service and other revenue 28,738 28,541 58,269 54,305
--------- --------- --------- ---------
Total revenue 64,788 75,354 127,343 146,780
--------- --------- --------- ---------
Cost of sales:
Cost of product revenue 14,747 17,265 28,347 35,898
Cost of service and other revenue 19,302 18,531 38,623 33,377
--------- --------- --------- ---------
Total cost of sales 34,049 35,796 66,970 69,275
--------- --------- --------- ---------
Gross margin 30,739 39,558 60,373 77,505
Operating expenses:
Sales and marketing 18,208 21,886 37,246 43,494
Research and development 11,077 11,099 22,517 21,382
General and administrative 3,063 3,573 6,136 6,461
Restructure costs 3,380 -- 3,383 --
--------- --------- --------- ---------
Total operating expenses 35,728 36,558 69,282 71,337
--------- --------- --------- ---------
Income (loss) from operations (4,989) 3,000 (8,909) 6,168
Other income (expense):
Interest income 1,697 1,705 3,165 3,365
Interest expense (475) (482) (967) (990)
Other (116) 780 7,461 654
--------- --------- --------- ---------
Income (loss) before taxes (3,883) 5,003 750 9,197
Income tax provision (benefit) (970) 1,513 188 2,759
--------- --------- --------- ---------
Income (loss) before extraordinary gain (2,913) 3,490 562 6,438
Extraordinary gain on repurchase of debentures -- 39 -- 39
--------- --------- --------- ---------
Net income (loss) $ (2,913) $ 3,529 $ 562 $ 6,477
========= ========= ========= =========
Basic earnings (loss) per share
Income (loss) before extrardinary item $ (0.14) $ 0.16 $ 0.03 $ 0.30
========= ========= ========= =========
Net income (loss) $ (0.14) $ 0.16 $ 0.03 $ 0.30
========= ========= ========= =========
Diluted earnings (loss) per share
Income (loss) before extrardinary item $ (0.14) $ 0.16 $ 0.03 $ 0.29
========= ========= ========= =========
Net income (loss) $ (0.14) $ 0.16 $ 0.03 $ 0.29
========= ========= ========= =========
Shares used in per share calculation
Basic 21,332 21,625 21,359 21,599
========= ========= ========= =========
Diluted 21,332 21,952 21,509 22,203
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------------- -----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(2,913) $ 3,529 $ 562 $ 6,477
Other comprehensive income, net of taxes:
Cumulative translation adjustment 240 892 90 176
Net unrealized gain (loss) on securities, 24 (3,066) (6,981) (1,320)
net of taxes
Less: reclassification adjustment for gain (loss)
included in net income (3) 1,038 7,513 1,040
------- ------- ------- -------
Comprehensive income (loss) $(2,652) $ 2,393 $ 1,184 $ 6,373
======= ======= ======= =======
</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>
Six Months Ended
-----------------------
Sept 26, Sept 27,
1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents at beginning of period $ 13,720 $ 59,512
Net cash flows from operating activities:
Net income 562 6,477
Adjustments to reconcile net income to cash
provided by operations:
Extraordinary gain on repurchase of debentures -- (39)
Depreciation and amortization 11,791 9,931
Restricted stock compensation 7 163
Restructure charge 3,318 --
Loss on disposition of property and equipment 132 --
Deferred income taxes (3,499) --
Changes in assets and liabilities:
Accounts receivable (6,640) 8,668
Inventories 2,698 158
Prepaid expenses and other assets 517 80
Accounts payable (4,676) (3,480)
Accrued liabilities 1,288 (4,099)
-------- --------
Net cash provided by operations 5,498 17,859
-------- --------
Cash flows from investing activities:
Purchases of temporary cash investments (48,528) (40,431)
Proceeds from maturities of temporary cash investments 84,004 49,046
Purchases of property and equipment (3,156) (22,279)
Additions to software production costs (1,328) (1,692)
Other 407 581
-------- --------
Net cash provided by (used for) investing activities 31,399 (14,775)
-------- --------
Cash flows from financing activities:
Sale of common stock 1,835 3,857
Purchase of common stock (3,005) (5,617)
Repurchase of convertible subordinated debentures -- (565)
-------- --------
Net cash used for financing activities (1,170) (2,325)
-------- --------
Effect of exchange rate changes on cash 22 (187)
-------- --------
Net increase in cash and cash equivalents 35,749 572
Cash and cash equivalents at end of period $ 49,469 $ 60,084
======== ========
Other cash flow information:
Cash paid (refunded) for:
Interest $ 936 $ 989
Income taxes $ (6,190) $ (417)
Non-cash investing activities:
Net unrealized (loss) on available-for-sale securities $ (6,981) $ (1,320)
</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 September 26, 1999, and the results of
operations and cash flows for the quarter and six months ended September
26, 1999 and September 27, 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 six months
ended September 26, 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):
September 26, March 31,
1999 1999
------- -------
(unaudited)
Purchased components $ 1,760 $ 3,728
Work-in-process 12,084 13,168
Finished goods 2,650 2,297
------- -------
$16,494 $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 168,000 and 327,000 for the
three months ended September 26, 1999 and September 27, 1998,
respectively, and 150,000 and 604,000 for the six months ended September
26, 1999 and September 27, 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 September 26, 1999, as their inclusion would
have been antidilutive.
4. Comprehensive Income
Cumulative comprehensive income at September 26, 1999 and March 31, 1999
is comprised of cumulative foreign translation adjustments of ($718,000)
and ($808,000), respectively, and cumulative net unrealized gains (losses)
on available-for-sale securities of ($252,000) 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.
7
<PAGE>
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
restructuring provision of $1.6 million remains as of September 26, 1999.
The Company will pay $0.6 million during the remainder of fiscal 2000 and
$1.0 million in fiscal 2001.
Restructure Remaining
Liability at Paid through Liability at
March 31, 1999 Sept. 26, 1999 Sept. 26, 1999
-------------- -------------- --------------
Compensation $3,540 $2,170 $1,370
Outplacement 499 375 124
Office Closures 119 55 64
------ ------ ------
Totals $4,158 $2,600 $1,558
------ ------ ------
In July 1999, the Company announced a reorganization to streamline its
organizational structure and to bring expenses in line with projected
revenue. Implementation of the reorganization resulted in the Company
reducing its work force by approximately 7% worldwide.
The Consolidated Statements of Operations for the quarter ended September
26, 1999 includes a charge of $3.4 million, consisting of $3.2 million for
employee severance and other related costs and $0.2 million for office
closures. A restructuring provision of $1.8 million remains as of
September 26, 1999. The Company will pay $1.6 million during the remainder
of fiscal 2000 and $0.2 million in fiscal 2001.
Restructure Remaining
Liability Paid through Liability at
Accrued Sept. 26, 1999 Sept. 26, 1999
------- -------------- --------------
Compensation $2,943 $1,586 $1,357
Outplacement 266 39 227
Office Closures 174 4 170
------ ------ ------
Totals $3,383 $1,629 $1,754
------ ------ ------
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.
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,
2002.
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 Shareholders 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, and below in this
Management's Discussion and Analysis. 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 Operations expressed as a percentage of revenue for
the periods presented:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
------------- ----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
Percent of Revenue 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product revenue 55.6 62.1 54.2 63.0
Service and other revenue 44.4 37.9 45.8 37.0
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
------ ------ ------ ------
Product gross margin 59.1 63.1 59.0 61.2
Service and other revenue gross margin 32.8 35.1 33.7 38.5
------ ------ ------ ------
Total gross margin 47.4 52.5 47.4 52.8
------ ------ ------ ------
Sales and marketing 28.1 29.0 29.2 29.6
Research and development 17.1 14.7 17.7 14.6
General and administrative 4.7 4.7 4.8 4.4
Reorganization expense 5.2 0.0 2.7 0.0
------ ------ ------ ------
Total operating expenses 55.1 48.5 54.4 48.6
------ ------ ------ ------
Income (loss) from operations (7.7) 4.0 (7.0) 4.2
------ ------ ------ ------
Net income (loss) (5.0) 4.7 0.4 4.4
====== ====== ====== ======
- ------------------------------------------------------------------------------------------
</TABLE>
Revenue
Total revenue for the second quarter of fiscal 2000 decreased 14.0% from the
second quarter of fiscal 1999, and decreased 13.2% on a year-to-date basis from
the comparable period of the prior year. Similarly, product revenue for the
second quarter of fiscal 2000 decreased 23.0%, or $10.8 million, and decreased
on a year-to-date basis 25.3%, or $23.4 million, from the comparable period of
the prior year. A decrease in sales through the North America channel and the
Europe/Middle East channel as compared to the prior year negatively impacted
both the quarter and year-to-date periods. The decrease in product sales in the
North America channel was the result of lower sales to service providers,
principally the Emerging
9
<PAGE>
Service Providers and the Global Network Service Providers. The primary reason
for the decrease is personnel turnover including some members of management in
the sales organization. The Company is in the process of hiring new sales
personnel and increasing the focus by management to rebuild the North America
sales team. The decrease in product sales in the Europe/Middle East channel
resulted from lower sales to distributors and enterprise customers in the
European market. Partially offsetting this decline was an increase in product
sales through the U.S. Federal and the Asia Pacific/Latin America channels for
both periods. The increase in product sales to the U.S. Federal channel resulted
from higher sales of Promina upgrades for the U.S. government networks. The
increase in product sales to the Asia Pacific/Latin America channel resulted
from higher sales of Promina upgrades for customer networks in China.
Service and other revenue for the second quarter and first six months of fiscal
2000 increased $0.2 million and $4.0 million, respectively, from the comparable
periods of fiscal 1999. Service revenue for the second quarter and first six
months of fiscal 2000 decreased $1.6 million and $2.4 million, respectively,
from the comparable periods of fiscal 1999. The decrease in service revenue is
principally the result of delayed or cancelled service contract renewals. The
Company is in the process of developing and marketing new service solutions to
better fit customer needs and thereby generate additional service revenue. Other
revenue for the second quarter and first six months of fiscal 2000 increased
$1.8 million and $6.4 million, respectively, from the comparable periods of
fiscal 1999. The increase in 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 decreased to 47.4% for both
the second quarter and first six months of fiscal 2000 from 52.5% and 52.8%,
respectively, from the comparable periods of fiscal 1999. The decrease is
primarily a result of lower product revenue as a percent of total revenue for
the second quarter and first six months of fiscal 2000 from the comparable
periods of fiscal 1999. Product margins decreased to 59.1% and 59.0%,
respectively, for the second quarter and first six months of fiscal 2000 from
63.1% and 61.2% in the comparable periods of the prior year. The
quarter-over-quarter and year-over-year decrease resulted primarily from
unfavorable manufacturing variances that resulted from lower product volumes.
Service and other gross margin decreased to 32.8% and 33.7%, respectively, for
the second quarter and first six months of fiscal 2000 from 35.1% and 38.5% in
the comparable periods of fiscal 1999. The gross margins were negatively
impacted in the second quarter and first six months of fiscal 2000 by an
increase in other revenue, which has lower margins. Service gross margin for the
second quarter of fiscal 2000 increased to 44.1% from 43.8% in the second
quarter of fiscal 1999. The increase in the second quarter of fiscal 2000
resulted from lower expenses when compared to the second quarter of fiscal 1999.
Service gross margin for the first six months of fiscal 2000 decreased to 44.4%
from 47.4% in the second quarter of fiscal 1999. The decrease is a result of
lower revenue and similar expenses.
Management expects product and service and other revenue gross margins for the
balance of fiscal 2000 to remain fairly comparable to gross margins experienced
in the first two quarters of fiscal 2000.
Operating Expenses
Operating expenses in the second quarter and first six months of fiscal 2000
decreased $0.8 million and $2.1 million, respectively, from the comparable
periods of fiscal 1999, and increased as a percentage of total revenue to 55.1%
from 48.5% quarter-over-quarter and 54.4% from 48.6% year-over-year. In the
second quarter of fiscal 2000, the Company completed a restructuring that
resulted in a restructure charge of $3.4 million in the quarter. Excluding the
restructure expense of $3.4 million in the second quarter of fiscal 2000,
operating expenses in the second quarter and first six months in fiscal 2000
decreased $4.2 million and $5.4 million, respectively, from the comparable
periods of fiscal 1999. In addition to the restructure charge of $3.4 million in
the second quarter of fiscal 2000, the Company incurred a restructure charge of
$4.7 million in the fourth quarter of fiscal 1999. Both restructure charges
included reductions in work force, which contributed to lower operating costs as
a percentage of total revenue. Excluding the restructure expense in the second
quarter of fiscal 2000, operating expenses as a percentage of total
10
<PAGE>
revenue increased to 49.9% from 48.5% quarter-over-quarter and 51.7% from 48.6%
year-over-year. Operating expense percentages increased in the second quarter
and first six months of fiscal 2000 as a result of lower revenue when compared
to both prior periods. Management expects operating costs in fiscal 2000 to be
lower in quarter-over-quarter and year-over-year comparisons to fiscal 1999.
Sales and marketing expense decreased $3.7 million and $6.2 million in the
second quarter and first six months of fiscal 2000, respectively, from the
comparable periods of fiscal 1999. This expense decreased as a percentage of
total revenue to 28.1% from 29.0% quarter-over-quarter and to 29.2% from 29.6%
year-over-year. The decrease in spending quarter-over-quarter and year-over-year
is a result of lower headcount and lower sales expenses based on lower product
revenues. Management expects sales and marketing spending to remain constant or
increase slightly during the remainder of fiscal 2000, while decreasing as a
percentage of revenue.
Research and development expense in the second quarter of fiscal 2000 remained
constant at $11.1 million when compared to the second quarter of fiscal 1999 and
increased to $22.5 million from $21.4 million in year-over-year comparison. The
expense increased as a percentage of total revenue to 17.1% from 14.7%
quarter-over-quarter and to 17.7% from 14.6% year-over-year. The increase in
research and development spending as a percentage of total revenue is
principally the result of lower revenue. Management expects research and
development spending to be lower in quarter-over-quarter and year-over-year
comparisons to fiscal 1999.
General and administrative expense decreased $0.5 million and $0.3 million in
the second quarter and first six months of fiscal 2000, respectively, from the
comparable periods of fiscal 1999, and remained fairly constant as a percentage
of total revenue. Management expects general and administrative expense to
remain at current levels for the balance of fiscal 2000.
Non-Operating Items
Interest income, primarily related to cash investments, for the second quarter
of fiscal 2000 remained fairly constant at $1.7 million and decreased on a
year-to-date basis by $0.2 million from the comparable period of fiscal 1999.
Interest expense, primarily related to the 7-1/4% convertible subordinated
debentures, for the second quarter and first six months of fiscal 2000 remained
constant with the comparable periods of the prior year.
Other income in the first six months of fiscal 2000 includes a gain of $7.5
million in the first quarter from the Company's sale of all its equity
securities held in a publicly traded company.
The second quarter of fiscal 2000 included a benefit for income tax of $1.0
million, and for the first six months of fiscal 2000, a net tax expense of $0.2
million at an effective tax rate of 25% comparable to a tax expense of $1.5
million and $2.8 million, respectively, in the comparable periods from the prior
year at a tax rate of 30%. The lower effective tax rate in fiscal 2000 is
primarily attributable to an increase in recognizable tax credits, the impact of
tax exempt interest income, and the tax benefits associated with the Company's
Foreign Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 1999, the Company had cash, cash equivalents and temporary
cash investments of $147.9 million, as compared to $154.6 million as of March
31, 1999. Cash provided by operations was $5.5 million during the first six
months of fiscal 2000, which was a $12.4 million decrease from the cash provided
by operations from the comparable period of the prior year. This decrease
resulted from an increase in accounts receivable and a reduction in net income.
Partially offsetting this decline was a federal income tax refund of $6.2
million.
11
<PAGE>
Net cash provided by investing activities of $31.4 million for the first six
months of fiscal 2000 consisted primarily of the proceeds from maturities on
temporary cash investments amounting to $84.0 million, partially offset by
purchases of temporary cash investments amounting to $48.5 million. During the
first six months of fiscal 2000, the Company was transitioning its investments
from tax exempt securities into taxable securities.
Net cash used for financing activities of $1.2 million for the first six months
of fiscal 2000 pertains to the repurchase of the Company's Common Stock of $3.0
million partially offset by $1.8 million received from the issuance of Common
Stock relating to the employee stock benefit plans.
As of September 26, 1999, the Company had available a secured $10.0 million line
of credit. The Company has identified $10.0 million as restricted cash on the
balance sheet as of September 26, 1999. Borrowings under this committed facility
are available through May 2000 and would bear interest at the bank's base rate
(which approximates prime). At September 26, 1999, there were no outstanding
borrowings under this facility.
The Company has in place a share repurchase program. Since the beginning of the
quarter through November 6, 1999, the Company has repurchased approximately
76,800 common shares at an average price of $10.02 per common share. The Company
intends to continue its share repurchase program for the remainder of fiscal
2000 and from time to time will reenter the market to repurchase shares.
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, research and development programs,
and repurchase shares of stock currently planned at least through fiscal 2000.
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
necessarily indicative of future revenue levels. For the first and second
quarters of fiscal year 2000, the Company has been operating without significant
backlog and has been scheduling production and certain expenses based more upon
forecasts of sales, which are difficult to predict. Forecasting sales during a
quarter is difficult in part because a large portion of the Company's orders
historically have been received and filled in the last month of the quarter.
This ordering pattern creates 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, the advent of the Year 2000 may cause a decline in customer
purchases during the Company's third, and possibly fourth, fiscal quarter. See
Year 2000 discussion below in this Business Environment and Risk Factors
section. Additionally, 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
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political and economic instability, 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
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.
Because companies operating in this market typically do not have either long
operating histories or significant capitalization, financing assistance is often
required to consummate the transaction. In addition to its loss sharing
agreement with BankBoston, the Company entered into a loss sharing agreement
with one of its resellers whereby the Company will share in a percentage of any
loss arising from a customer's failure to pay the reseller for N.E.T. equipment.
Should a significant number of customers in any loss sharing pool or should one
large customer default, the Company could be significantly impacted both as to
revenue and expense. The Company has increased its reserves to reduce the
potential risk associated with these transactions.
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 to make up any shortfall. Should U.S.
government orders substantially decline, Company revenues could be materially
adversely impacted.
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. They are often able to devote greater resources to the development,
marketing and sale of their products. Further, some of these competitors have
large market capitalizations or significant cash reserves that make them better
able to acquire other companies with technology and/or products that are
competitive with the Company. By these acquisitions, a competitor could obtain a
strategic advantage that may adversely affect the Company's business, financial
position or results of operations.
In addition, the Company has distribution, resale, product and technology
relationships with a number of significant customers, resellers and other
entities that are considered by the Company to be strategic. In particular,
sales outside the U.S. occur primarily through reseller channels. Most of the
Company's competitors have similar relationships including relationships with
distributors and resellers who also distribute and resell the Company's
products. Changes in the Company's relationships with its distributors or
resellers or changes in similar relationships among competitors or between
competitors and the Company's distributors or resellers could have a material
impact on competitive and other factors described above, including the Company's
business, financial position or results of operations.
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.
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The Company plans to continue to improve its current circuit based products
while developing and introducing new products for the broadband market. In
either enhancing its current circuit based products or in the development and
introduction of its broadband products, the Company may not be able to
successfully develop and market new or enhanced products, 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. Further, the Company may not be able to respond
effectively to technological changes or new product announcements by
competitors. If the Company is not able to introduce its broadband products in a
timely manner, competitors may gain market advantage making it difficult for the
Company to achieve market acceptance of its broadband products.
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.
The Company has received notice from both IBM and Lucent Technologies of the
possible infringement by certain of the Company's products of certain IBM and
Lucent patents. The Company is in discussions with both IBM and Lucent and is
investigating the validity of these claims. Depending upon the outcome of these
investigations, the Company is prepared to either vigorously defend itself or
enter into a licensing agreement with IBM or Lucent on commercially reasonable
terms. There is no guarantee, however, that the Company will be able to
negotiate licensing agreements on commercially reasonable terms or that
litigation would not have an adverse affect on the Company's business, financial
position or results of operations.
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, such as engineering and sales. One of two vacant senior
management positions, the Vice President of Product Development, has recently
been filled by an internal candidate. The search for a Chief Financial Officer,
the other open senior management position, is ongoing. The market for engineers
and sales personnel is extremely competitive. The failure of the Company to
attract, hire and retain executive officers, senior managers and other key
engineering and sales 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.
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
supplies. 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,
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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.
Facilities
In April 1998, the Company moved its corporate headquarters to Fremont,
California. The Company has since discovered problems with what appears to be
ground water infiltration of the buildings and has begun discussion with the
Lessor under the building lease and the Company's commercial insurance carrier
regarding a remedy. To date, the Company has incurred expenses for attorneys and
required experts to evaluate the extent of the problem. The Company's failure to
obtain a satisfactory remedy for the problem could interrupt the Company's
operations to an extent where it could adversely impact revenue, financial
position or results of operations or could otherwise adversely affect the
Company's operations, revenue, or financial position.
Restructuring
In July 1999, the Company announced a restructuring to streamline its
organizational structure and to bring expenses in line with projected revenues.
The streamlining reduced the structure of the Company to five functional areas:
Marketing, Sales and Service, Product Development, Operations and Finance. The
Vice Presidents of Marketing, Product Development, and Operations, the Senior
Vice President of Sales and Service and the Chief Financial Officer will all
report to the President and CEO along with the Company's General Counsel. In
addition, the Sales and Service organization will be divided geographically
between the Americas (North and South) and International. Implementation of the
reorganization included reductions at all levels of the Company and in all
functional areas, other than Marketing and field Sales. In particular, the
Company reduced its work force by approximately 7% worldwide. Expenses related
to the restructuring have been recognized in the second quarter of the current
fiscal year. See Note 5 to the Notes to Condensed Consolidated Financial
Statements.
While the intent of the restructuring is to increase efficiency by simplifying
the organizational structure and to bring expenses in line with revenue, there
is no guarantee that the sought after efficiency will result, that expenses will
be reduced sufficiently to return the Company to profitability, or that the
restructuring will have a positive long term effect.
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 and the lock down of customer networks in preparation for the Year
2000.
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 has completed
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the majority of this evaluation. 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, or if customers temporarily halt the purchase of networking equipment
until after January 2000, 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 the Company is currently selling no such products.
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
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 where possible, has obtained certification
of the Year 2000 compliance of its OEM products, either in a writing from the
manufacturer, or from the manufacturer's web site. Notwithstanding the Company's
efforts to seek appropriate protection, there can be no guarantee that any
protection obtained to date will be sufficient to fully protect the Company
should Year 2000-related problems arise. 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. While the
Company does not believe that these provisions require it to make a customer's
network Year 2000 compliant, it is possible that customers will disagree with
the Company's analysis of these provisions and assert claims against the
Company.
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 late 1997,
the Company mailed the then current Compliance Program Information to the
majority of its customers. In addition, in the just completed fiscal quarter,
the Company used information available to it to identify those direct sale end
users and reseller end users that it reasonably
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believed had not yet made their equipment Year 2000 compliant and sent a notice
informing them accordingly. Despite all its efforts, however, the Company cannot
guarantee that customers who have been notified of their need to become Year
2000 compliant will take the necessary compliance actions. Substantial portions
of the Company's sales are to end users outside of the U.S., primarily through
resellers of the Company's products. As a result, the Company may not have been
able to identify each and every resale end user. 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 of which the Company is presently aware, 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 or a customer's ability to successfully prosecute a Year
2000 claim against the Company should one be asserted. The Company believes that
the recently passed federal legislation, the Y2K Act, may be of some assistance
in reducing, or at least deferring, Year 2000 litigation that otherwise might be
asserted against the Company. The Act will not, however, prevent such litigation
from being filed if the customer follows the procedures specified in the Act and
no resolution of the problem is achieved. Similarly, 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.
The Company has been informed that some customers may be engaging in a self-help
solution to become Year 2000 compliant by turning back the internal clock in
their network equipment to a year whose sequence of dates is the same as that of
calendar year 2000. The impact to customer networks from this self-help solution
is unknown. Depending on whether the self-help solution is successful, the
Company could face increased liability to either customers whose networks fail
due to their decision to turn the clock back, or to customers who purchase Year
2000 compliant systems from N.E.T. but who allege they could have become
compliant through turning back the clock. The Company itself has not encouraged
this self-help solution, but is aware of certain resellers who may have done so
with at least some of their resale customers. The Company is working with those
resellers to encourage their resale customers to utilize the Company's preferred
Year 2000 compliance solutions, as described on the Company's web site.
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. In addition, a number of companies
in the U.S. and elsewhere have indicated that they will lock down their networks
in preparation for January 1, 2000 and will not be purchasing new networking
equipment in the last calendar quarter of 1999 and
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possibly into the first calendar quarter of 2000. Should the Company's customers
decide to lock down their networks or should they decide not to purchase
networking equipment until after January 2000, these decisions could have a
material adverse affect on sales volume and consequently on revenue for the
Company's third and fourth quarters of fiscal year 2000.
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 has finished substantially all of its work in evaluating
and upgrading the Company's internal systems. As the Company's Year 2000
compliance team continues its work, it may discover new or additional Year 2000
problems, it may be notified by its suppliers of additional Year 2000 problems
for systems previously believed to be Year 2000 compliant, it may not be able to
develop and implement remediation or contingency plans, or it may find that the
costs of these activities exceed current expectations and become material.
Mission-Critical Systems
The Company has identified and tested its mission-critical systems to identify
Year 2000 problems, if any, and has developed plans to remediate, to the extent
possible, 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 was
substantially completed by September 30, 1999. The Company has in place
contingency plans to deal with the most likely impact of the Year 2000 on the
Company's mission-critical systems and is in the process of implementing these
plans. 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 majority of the Company's mission-critical systems in all categories are
compliant with requirements to continue functioning after the advent of the Year
2000. Wherever possible, all systems, both mission-critical and
non-mission-critical, are currently Year 2000 compliant although adjustments and
upgrades continue to be required as new problems are uncovered and identified by
the Company or its suppliers.
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 many suppliers are currently
still in the process of evaluating their internal systems for Year 2000
compliance and implementing any required contingency plans. 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 mission-critical suppliers, the
Company has developed contingency plans to ensure to the extent possible 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,
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transportation channels and mission-critical suppliers, rather than from the
failure of the Company's 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 reasonable.
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.
Staffing will be maximized at both the Company's Ashburn, Virginia and Crawley,
England Technical Assistance Centers for the period running from the end of
December 1999 through the beginning of January 2000 to handle any increase in
call traffic. The Company has been informing its maintenance customers as to its
plans for maintenance support during the Year 2000 changeover.
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 system failures. 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,
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replacement, service and maintenance obligations under its existing and future
sales, service and maintenance agreements.
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.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has been no material change, except as described below, 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.
The Company has sold its holdings in the publicly traded investment as disclosed
in its 1999 Annual Report.
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On August 10, 1999, the Company held its Annual Meeting of
Stockholders. At this meeting, the stockholders voted to elect James
K. Dutton and George M. Scalise as directors. James K. Dutton
received 17,299,371 votes in favor and 549,026 votes withheld, and
George M. Scalise received 17,596,767 votes in favor and 251,630
votes withheld. Continuing as directors are Dixon R. Doll, Walter J.
Gill, Hubert A.J. Whyte and Hans A. Wolf. At the meeting, the
stockholders also voted: 1) to increase the number of shares
available in the 1998 Employee Stock Purchase Plan by 1,000,000 as
follows: 12,625,286 votes in favor, 4,997,819 votes against, and
225,292 votes abstaining; 2) to increase the number of share options
available for issuance to any one Officer employee in any one
calendar year from 350,000 to 600,000 under the Company's 1993 Stock
Option Plan as follows: 10,570,509 votes in favor, 5,630,041 votes
against, and 1,647,847 votes abstaining; 3) to approve the amendment
to the Automatic Option Grant Program in the Company's 1993 Stock
Option Plan so that option grants to non-employee Directors will
vest immediately upon the option grant date and will then be
exercisable ratably over the three year period following the option
grant date as follows: 10,956,243 votes in favor, 6,646,143 votes
against, and 246,011 votes abstaining; and 4) to ratify the
appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the fiscal year ending March 31, 2000
as follows: 17,753,348 votes in favor, 70,874 votes against, and
24,175 votes abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On July 23, 1999, the Company filed a report on Form 8-K
reporting as an Other Event the reorganization of the Company
and its streamlined organizational structure.
(b) Reports on Form 8-K
On September 15, 1999, the Company filed a report on Form 8-K
reporting as an Other Event the extension of the Company's
Stockholder Rights Plan.
22
<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: November 10, 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)
23
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