UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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)
6530 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 June 30, 2000 was 21,571,062.
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 -
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations and
Statements of Comprehensive Income (Loss)- Quarters
ended June 30, 2000 and June 27, 1999 4
Condensed Consolidated Statements of Cash Flows -
Quarters ended June 30, 2000 and June 27, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
Part I
Financial Information
Item 1.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except shares numbers)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
----------------------------------------------------------------------------------------------------
(unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents, $2,324 restricted on June 30, 2000
and $13,144 restricted on March 31, 2000 $ 11,801 $ 28,024
Temporary cash investments 113,193 96,902
Accounts receivable, net of allowances of $5,693 at June 30, 2000
and $5,350 at March 31, 2000 40,990 39,317
Inventories 17,520 17,691
Prepaid expenses and other assets 6,466 6,087
----------------------------------------------------------------------------------------------------
Total current assets 189,970 188,021
----------------------------------------------------------------------------------------------------
Property and equipment, net 34,409 41,621
Software production costs, net 4,017 4,821
Goodwill and other intangible assets, net 14,419 15,220
Other assets 11,554 10,311
----------------------------------------------------------------------------------------------------
$ 254,369 $ 259,994
====================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,703 $ 9,009
Accrued liabilities 37,525 40,119
----------------------------------------------------------------------------------------------------
Total current liabilities 50,228 49,128
----------------------------------------------------------------------------------------------------
Long-term liabilities:
Capital leases 163 186
Non-current accrued liabilities 474 --
7 1/4% redeemable convertible subordinated debentures 24,706 24,706
----------------------------------------------------------------------------------------------------
Total long term liabilities 25,343 24,892
----------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none -- --
Common stock, $.01 par value
Authorized: 50,000,000
Outstanding: 21,571,062 shares at June 30 and
21,602,000 at March 31 215 216
Additional paid in capital 181,907 181,683
Treasury stock (6,371) (5,640)
Cumulative comprehensive loss (1,319) (1,349)
Retained earnings 4,366 11,064
----------------------------------------------------------------------------------------------------
Total stockholders' equity 178,798 185,974
----------------------------------------------------------------------------------------------------
$ 254,369 $ 259,994
====================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
(1) Derived from audited consolidated financial statements
3
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations and
Statements of Comprehensive Income (Loss)
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
Quarter ended
-------------
June 30, June 27,
2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Product revenue $ 22,513 $ 33,024
Service and other revenue 20,890 29,531
---------------------------------------------------------------------------------------------
Total revenue 43,403 62,555
---------------------------------------------------------------------------------------------
Cost of product revenue 12,159 13,600
Cost of service and other revenue 13,822 19,321
---------------------------------------------------------------------------------------------
Total cost of sales 25,981 32,921
---------------------------------------------------------------------------------------------
Gross margin 17,422 29,634
Operating expenses:
Sales and marketing 11,494 19,038
Research and development 10,375 11,440
General and administrative 3,196 3,076
Amortization of goodwill and other intangible assets 801 --
---------------------------------------------------------------------------------------------
Total operating costs 25,866 33,554
---------------------------------------------------------------------------------------------
Loss from operations (8,444) (3,920)
Interest income 1,868 1,468
Interest expense (539) (492)
Other 432 7,577
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,683) 4,633
Income tax provision (benefit) 15 1,158
---------------------------------------------------------------------------------------------
Net income (loss) $ (6,698) $ 3,475
=============================================================================================
Earnings (loss) per share:
Basic $ (0.31) $ 0.16
Diluted $ (0.31) $ 0.16
---------------------------------------------------------------------------------------------
Shares used in per share computation:
Basic 21,587 21,388
Diluted 21,587 21,480
---------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Comprehensive Income (Loss)
---------------------------------------------------------------------------------------------
Net income (loss) $ (6,698) $ 3,475
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (162) (150)
Net unrealized gains (losses) on securities, net of taxes of
$0 at June 30, 2000 and $3,771 at June 27, 1999 195 (7,005)
Less reclassification adjustment for gains
included in net income -- 7,520
---------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (6,665) $ 3,840
---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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NETWORK EQUIPMENT TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands - unaudited)
<TABLE>
<CAPTION>
Quarter ended
-------------
June 30, June 27,
2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents at beginning of year $ 28,024 $ 13,720
--------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) (6,698) 3,475
Adjustments required to reconcile net income (loss) to net
cash used for operations:
Depreciation and amortization 4,982 6,647
Amortization of goodwill and intangibles 801
Restructure liability 6,127 --
Restricted stock compensation -- 3
Deferred income taxes -- (3,499)
Loss on disposition of property and equipment 235 --
Changes in assets and liabilities:
Accounts receivable (1,993) (13,032)
Inventories 166 1,254
Prepaid expenses and other assets 548 (241)
Accounts payable (350) 2,890
Accrued liabilities (8,595) (3,240)
--------------------------------------------------------------------------------------------
Net cash used for operations (4,777) (5,743)
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of temporary cash investments (21,255) (15,908)
Proceeds from maturities of temporary cash investments 4,769 29,021
Purchases of property and equipment (2,091) (1,932)
Additions to software production costs -- (794)
Cash paid for acquisition of company (1,500) --
Other (1,286) 156
--------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (21,363) 10,543
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of common stock 905 1,010
Repurchase of common stock (1,413) (3,005)
Insurance settlement proceeds 10,000 --
--------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 9,492 (1,995)
--------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 425 (322)
Net increase (decrease) in cash and cash equivalents (16,223) 2,483
--------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,801 $ 16,203
============================================================================================
Other cash flow information:
Cash paid during the year:
Interest $ 900 $ 924
Income taxes -- 146
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities $ 195 $ (7,005)
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the accounts of Network Equipment
Technologies, Inc. doing business as net.com ("net.com") and its subsidiaries.
Intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) considered necessary to present fairly the financial
position as of June 30, 2000, and the results of operations and cash flows for
the quarters ended June 30, 2000 and June 27, 1999. These financial statements
should be read in conjunction with the March 31, 2000 audited consolidated
financial statements and notes thereto. The results of operations for the
quarter ended June 30, 2000 are not necessarily indicative of the results to be
expected for the fiscal year ending March 31, 2001.
2. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead costs. Inventories at June
30, 2000 and March 31, 2000 consisted of the following:
(Dollars in thousands) June 30, 2000 March 31, 2000
--------------------------------------------------------------------------------
Purchased components $ 3,647 $ 2,866
Work-in-process 12,033 13,868
Finished goods 1,840 957
--------------------------------------------------------------------------------
$17,520 $17,691
================================================================================
3. Earnings (Loss) Per Share
Basic earnings (loss) per share have 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. These shares totaled 158,000 and 92,000 for the quarter ended
June 30, 2000 and June 27, 1999, respectively. The 158,000 shares for the
quarter ended June 30, 2000 were excluded from, and the 92,000 shares for the
quarter ended June 27, 1999 were included in the per share computation.
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 periods ended June 30, 2000 or June 27, 1999, as their inclusion
would have been antidilutive in both periods.
4. Comprehensive Income
Accumulated comprehensive income (loss) at June 30, 2000 and March 31, 2000 is
comprised of cumulative foreign translation adjustments of ($964,000) and
($802,000), respectively, and cumulative net unrealized losses on
available-for-sale securities of ($352,000) and ($547,000), respectively.
5. Restructure Costs
Fourth Quarter Fiscal Year 1999 Restructuring
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 $119,000 for office closures. A restructuring accrual of
$874,000 remains as of June 30, 2000. We expect that the accrual will be paid in
its entirety during fiscal 2003.
Restructure Paid Remaining
Charge To Date Accrual
Compensation $3,964 $3,090 $ 874
Outplacement 597 597 --
Office closures 135 135 --
------ ------ ------
Totals $4,696 $3,822 $ 874
====== ====== ======
6
<PAGE>
Second Quarter Fiscal Year 2000 Restructuring
The Condensed Consolidated Statements of Operations for fiscal 2000 included a
charge of $3.4 million taken in the second quarter of fiscal year 2000,
consisting of $3.2 million for employee severance and other related costs and
$174,000 for office closures. A restructuring accrual of $304,000 remains as of
June 30, 2000. We expect that the accrual will be paid in its entirety during
fiscal 2001.
Restructure Paid Remaining
Charge To Date Accrual
Compensation $2,912 $2,619 $ 293
Outplacement 266 266 --
Office closures 174 163 11
------ ------ ------
Totals $3,352 $3,048 $ 304
====== ====== ======
Fourth Quarter Fiscal Year 2000 Restructuring
The Condensed Consolidated Statements of Operations for fiscal 2000 included a
charge of $12.2 million taken in the fourth quarter of fiscal 2000 consisting of
$7.3 million for employee severance and other related costs and $4.9 million for
office closures and related costs. A restructuring accrual of $4.9 million
remains as of June 30, 2000. We expect that the accrual will be substantially
paid during fiscal 2001.
Restructure Paid Remaining
Charge To Date Accrual
Compensation $ 6,710 $ 5,742 $ 968
Outplacement 636 399 237
Office closures 4,869 1,125 3,744
------- ------- -------
Totals $12,215 $ 7,266 $ 4,949
======= ======= =======
6. Recently Issued Accounting Standard
Financial Accounting Standards Board (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, establishes accounting and
reporting standards for derivative instruments. Adoption of this statement will
not materially impact our consolidated financial condition, results of
operations or cash flows. This statement is effective for us beginning April 1,
2001.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements" which summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We believe that our revenue
recognition policy complies with the provisions of SAB No. 101.
7. Acquisition
In the first quarter of fiscal 2001, we acquired the assets of privately held
Convergence Equipment Company ("Convergence") from Global Communication
Technologies, Inc. for $1.5 million in cash. Convergence designs and
manufactures next generation IP (internet protocol) telephony platforms.
Included in the transaction are the Convergence engineering team, intellectual
property, and a full-featured IP voice switch. The operating results for
Convergence have been included in the consolidated statements of operations for
net.com effective May 4, 2000, the date of the acquisition. The acquisition was
accounted for as a purchase. At June 30, 2000, we were still in the process of
evaluating the acquisition and the value of the purchased tangible net assets
and the value of the resulting goodwill and intangible assets. We expect this
valuation to be completed in the second fiscal quarter of fiscal 2001. We will
amortize the goodwill and intangible assets on a straight-line basis over a
period of three to five years. No amount of the purchase price is expected to be
ascribed to in process research and development costs.
7
<PAGE>
8. Employee Stock Purchase Plan Share Issuance
Under net.com's 1998 Employee Stock Purchase Plan ("ESPP"), net.com's employees,
subject to certain restrictions, may purchase shares of net.com Common Stock at
a price equal to at least 85% of the lower of the market value of the Common
Stock at the beginning of the offering period or at the end of each four month
purchase period. net.com recently discovered that for the April 28, 2000 ESPP
purchase date, it had inadvertently failed to register 49,343 shares of the
total 78,461 shares issued under the ESPP. net.com intends to offer recission
rights for one year to employees who received the unregistered shares wherein
net.com will offer to repurchase the unregistered shares at the original price
paid by the employee plus interest at the legal rate. All shares were sold at
$6.80 per share for a total aggregate repurchase price of $335,532 plus
interest.
9. Federal OEM Product Sales Reporting
Product revenue from our Federal Sales channel in the first quarter of fiscal
2001 included $1.3 million of Federal OEM product sales. In the first quarter of
fiscal 2000, and in all other previous quarters, Federal OEM product sales were
reported as part of service and other revenue rather than as part of product
revenue. Excluding the $1.3 million in OEM sales, product revenue for the first
quarter of fiscal 2001 would be $21.2 million compared to $33.0 million in the
first quarter of fiscal 2000. Service and other revenue in the first quarter of
fiscal 2001 including the $1.3 million in OEM sales would be $22.2 million
compared to $29.5 million in the first quarter of fiscal 2000. The reporting of
Federal OEM product sales as part of product revenue in fiscal 2001 is
consistent with industry practice for reporting product revenues.
In addition, in the first quarter of fiscal 2001, cost of product sales included
$1.1 million in cost for Federal OEM product sales. Excluding the $1.1 million,
cost of product sales in the first quarter of fiscal 2001 would be $11.1 million
compared to $19.3 million in the first quarter of fiscal 2000. Cost of service
and other revenue in the first quarter of fiscal 2001 including the $1.1 million
in cost would be $14.9 million compared to $19.2 million in the first quarter of
fiscal 2000.
10. General and Administrative Expense Reporting
General and administrative expense in the first quarter of fiscal 2001 includes
approximately $450,000 of expenses for payroll, recruiting and legal expenses,
which previously would have been, allocated to other expense categories on the
income statement. Specifically, in the first quarter of fiscal 2000, and in all
other previous quarters, the same expenses were reported as cost of product,
cost of service, sales and marketing, and research and development expenses.
Excluding the reclassification of the $450,000 general and administrative
expense in the first quarter of fiscal 2001, general and administrative expense
would be $2.7 million compared to $3.1 million in the first quarter of fiscal
2000. Cost of product in the first quarter of fiscal 2001 would be $12.2 million
compared to $13.6 million in the first quarter of fiscal 2000. Cost of service
in the first quarter of fiscal 2001 would be $13.9 million compared to $19.3
million in the first quarter of fiscal 2000. Sales and marketing expense in the
first quarter of fiscal 2001 would be $11.8 million compared to $19.0 million in
the first quarter of fiscal 2000. Research and development expense in the first
quarter of fiscal 2001 would be $10.5 million compared to $11.4 million in the
first quarter of fiscal 2000. The reporting of payroll, recruiting and legal
expense in general and administrative expense in fiscal 2001 provides consistent
measurement of total general and administrative expenses.
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 Part I of the
Company's Form 10-K for the fiscal year ended March 31, 2000.
Statements made in this Management's Discussion and Analysis or elsewhere in
this quarterly report or other communications (including press releases and
analyst calls) contain forward-looking statements that involve risk and
uncertainty. These statements relate to future events or to our future financial
results. Forward-looking statements can often be identified by words such as
"may", "will", "should", "expect", "anticipate", "believe", "estimate" or words
of similar import. Our actual results may differ significantly from those
anticipated by any forward-looking statement as a result of a number of factors,
trends, and risks - many beyond our control. These factors and risks are
discussed further in the Business Environment and Risk Factors below and in the
Company's Form 10-K for the year ending March 31, 2000. We do not undertake an
obligation to update these forward -looking statements or risk factors to
reflect future events or circumstances.
Acquisition of Convergence Equipment Company
In the first quarter of fiscal 2001, we acquired the assets of privately held
Convergence Equipment Company from Global Communication Technologies, Inc. for
$1.5 million in cash. Convergence Equipment Company designs and manufactures
next generation IP (internet protocol) telephony platforms. Included in the
transaction are the Convergence Equipment Company's engineering team,
intellectual property, and a full-featured IP voice switch. The acquisition was
accounted for as a purchase. The purchase price, less the value of the fixed
assets acquired will be recorded as goodwill and other intangible assets and
will be amortized on a straight line basis over a period of three to five years.
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:
--------------------------------------------------------------------------------
Three Months Ended
------------------
Percent of Revenue June 30, 2000 June 27, 1999
--------------------------------------------------------------------------------
Product revenue 51.9% 52.8%
Service and other revenue 48.1 47.2
Total revenue 100.0 100.0
Product gross margin 46.0 58.8
Service and other revenue gross margin 33.8 34.6
Total gross margin 40.1 47.4
Sales and marketing 26.5 30.4
Research and development 23.9 18.3
General and administrative 7.4 4.9
Amortization of intangibles 1.8 0.0
Total operating expenses 59.6 53.6
Loss from operations (19.4) (6.3)
Net income (loss) (15.4)% 5.6%
--------------------------------------------------------------------------------
Revenue
Total revenue for the first quarter of fiscal 2001 decreased 30.6% or $19.2
million to $43.4 million from $62.6 million for the first quarter of fiscal
2000. Product revenue decreased 31.8% or $10.5 million to $22.5 million from
$33.0 million compared to the same period in fiscal 2000. The decrease in
product revenue was primarily due to a
9
<PAGE>
decline in sales of our circuit switched or "narrowband" product line,
Promina(R), which accounts for the majority of our product sales. The market for
circuit switched or "narrowband" products is declining as the market for packet
switched or "broadband" products is increasing. Product revenues in all four of
our sales channels described below declined in the first quarter of fiscal 2001
as compared to the first quarter of fiscal 2000. Product revenue for the North
America channel declined 37.1% to $3.1 million from $5.0 million
quarter-over-quarter. Product revenue in our Federal channel declined 33.4% to
$9.9 million from $14.9 quarter-over-quarter. Beginning with the first quarter
of fiscal 2001, product revenue in our Federal channel includes certain OEM
product sales, which have been reported previously as part of service and other
revenue. See Note 9, Federal OEM Product Sales Reporting, to Notes to
Consolidated Condensed Financial Statements of this Form 10Q. Excluding the
effect of this change, the Federal channel product revenue declined 42.2%
compared to the same period last year. Our two international channels, the
European channel and the Asia Pacific/Latin America channel declined 25.3% and
26.8%, respectively, to $5.1 million and $4.4 million, respectively, from $6.8
million and $6.0 million quarter-over-quarter. Net.com is currently developing
products for the packet switched or broadband equipment market, which will
replace our Promina product line. Revenue from broadband products is not
expected until the second quarter of fiscal 2001 and significant revenue is not
expected until fiscal 2002.
Service and other revenue for the first quarter of fiscal 2001 decreased 29.2%
to $20.9 million from $29.5 million for the first quarter of fiscal 2000. The
decrease in service and other revenue is a result of a decline in the installed
base of equipment that requires ongoing service support. In addition,
approximately $1.3 million in OEM product sales specific to the Federal channel
have been reported as product revenue in the first quarter of fiscal 2001 rather
than other revenue as in the same period last year. In the first quarter of
fiscal 2000, OEM product sales of $5.5 million specific to the Federal channel
were reported as service and other revenue. Excluding the effect of this change,
service and other revenue in the first quarter of fiscal 2001 decreased 24.9%
compared to the same period last year.
Gross Margin
Total gross margin, comprised of product and service margin, decreased as a
percentage of total revenue to 40.1% in the first quarter of fiscal 2001
compared to 47.4% in the first quarter of fiscal 2000. The decrease is primarily
the result of lower product revenue gross margins quarter-over-quarter. In the
first quarter of fiscal 2001, product gross margin decreased to 46.0% from 58.8%
in the first quarter of fiscal 2000. The decrease in product gross margins
resulted primarily from unfavorable manufacturing variances caused by lower
product revenues on relatively fixed manufacturing overhead. In addition, first
quarter domestic product revenues decreased as a percentage of total product
revenues to 57.9% compared to 61.2% quarter-over-quarter. Since product sales
through the domestic sales channels, North America and Federal produce higher
gross margins than product sales through the international sales channels,
Europe and Asia Pacific/Latin America, this shift in mix from domestic to
international product sales adversely impacted product gross margins.
Service and other revenue gross margins decreased to 33.8% in the first quarter
of fiscal 2001 from 34.6% in the first quarter of fiscal 2000. The gross margin
decline resulted primarily from lower service contract revenues and the
requirement to maintain certain fixed costs to support service contracts.
Operating Expenses
Operating expenses in the first quarter of fiscal 2001 decreased $7.7 million to
$25.9 million compared to $33.6 million in the first quarter of fiscal 2000.
Operating expenses as a percentage of total revenue increased to 59.6% in the
first quarter of fiscal 2001, compared to 53.6% in the first quarter of fiscal
2000. The lower operating expenses are primarily due to lower headcount
resulting from restructurings in the second and fourth quarters of fiscal 2000.
Operating expenses as a percentage of total revenue in the first quarter of
fiscal 2001 increased as a result of lower revenues than in the first quarter of
fiscal 2000.
Sales and marketing expenses in the first quarter of fiscal 2001 decreased $7.5
million to $11.5 million compared to $19.0 million in the first quarter of
fiscal 2000. Sales and marketing expenses as a percentage of total revenue
decreased to 26.5% in the first quarter of fiscal 2001, compared to 30.4% in the
first quarter of fiscal 2000. The decrease in spending is the result of reduced
headcount and continued focus on cost control. We expect sales and marketing
expenses to vary as a percentage of sales volume for the remainder of the fiscal
year.
Research and development expense in the first quarter of fiscal 2001 decreased
$1.0 million to $10.4 million compared to $11.4 million in the first quarter of
fiscal 2000. Research and development expense as a percentage of total revenue
increased to 23.9% in the first quarter of fiscal 2001 from 18.3% in the first
quarter of fiscal 2000. The
10
<PAGE>
decrease in spending is primarily the result of reduced headcount. Research and
development expense as a percentage of total revenue in the first quarter of
fiscal 2001 increased as a result of lower revenues than in the first quarter of
fiscal 2000. We expect research and development spending in future periods to
remain flat or to increase slightly compared to the first quarter of fiscal 2001
as we continue to focus on new broadband product development.
General and administration expense in the first quarter of fiscal 2001 increased
$123,000 to $3.2 million compared to $3.1 million in first quarter of fiscal
2000. General and administration expense as a percentage of total revenue
increased to 7.4% in the first quarter of fiscal 2001 from 4.9% in the first
quarter of fiscal 2000. Beginning in fiscal 2001 certain payroll, legal and
recruiting expenses will be reported in the general and administration expense
line. In previous periods the expenses were allocated into cost of good sold,
sales and marketing expense, and research and development expense. The effect of
this change was to increase general and administrative expenses by approximately
$450,000 for the quarter ending June 30, 2000. See Note 10, General and
Administrative Expense Reporting, to Notes to Consolidated Condensed Financial
Statements of this From 10Q. We expect general and administrative expense in the
future periods to remain flat or to decrease slightly compared to the first
quarter of fiscal 2001.
Amortization of goodwill and other intangibles expense was $801,000 in the first
quarter of fiscal 2001. This amortization expense is a result of the acquisition
of FlowWise Networks, Inc. that occurred in the third quarter of fiscal 2000. We
expect that amortization of goodwill and other intangibles expense will increase
in the future periods compared to the first quarter of fiscal 2001 as a result
of the amortization for goodwill and other intangibles associated with the
Convergence Equipment Company acquisition.
Non-Operating Items
Interest income, primarily related to cash investments increased $400,000 in the
first quarter of fiscal 2001 to $1.9 million compared to $1.5 million in the
first quarter of fiscal 2000. The increase is primarily the result of a shift in
the investment portfolio from tax-exempt securities to taxable securities that
contain a higher yield.
Interest expense, primarily related to the 7 1/4% convertible subordinated
debentures, increased $47,000 to $539,000 compared to $468,000 from the
comparable period in fiscal 2000. The increase is primarily related to debt
obligations assumed as part of the acquisition of FlowWise Networks, Inc. in the
third quarter of fiscal 2000.
Other income in the first quarter of fiscal 2001 decreased $7.2 million to
$432,000 compared to $7.6 million in the first quarter of fiscal 2000. Other
income in the first quarter of fiscal 2000 consisted principally of a $7.2
million gain from the sale of all of the equity securities held in a publicly
traded company.
The first quarter of fiscal 2001 included a tax provision of $15,000 compared to
$1.2 million recorded in the first quarter of fiscal 2000.
BUSINESS ENVIRONMENT AND RISK FACTORS
net.com's business is subject to the risks below. Although we have tried to
identify the material risks to our business, this not an all-inclusive list.
There may be additional risks not listed because either they have not yet been
identified or they are not material now, although they could become material in
the future. Any one of the risks identified below could materially impact our
business, results of operation or financial condition.
net.com has lost money for the past four quarters and could incur losses in
future quarters
While we have been profitable in the past, for the past four quarters and for
six out of the last seven quarters we have had losses. Our net loss totaled $6.7
million for the first quarter of fiscal year 2001. We will continue to incur
large research and development, marketing and sales expenses to release our new
SCREAM(TM) product line. Although we have taken a number of measures to reduce
expenditures, our SCREAM expenditures mean we need to generate significant
revenues to achieve profitability. Since we do not foresee revenue growth from
our existing Promina product line, profitability will need to come from the
growth in revenue associated with the introduction of new products including
those recently acquired. Even if we do achieve profitability in a future
quarter, we cannot guarantee that that profitability will be sustainable.
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Cash reserves may continue to decrease if losses continue
Because of our recent losses, we have had to use portions of our cash reserves
to fund operations. In the first quarter of fiscal year 2001, we expended $4.8
million of our cash reserves for this purpose. Until we become profitable, a
further decline in our cash reserves may be required in order to fund
operations. Further depletion of our cash reserves could negatively affect our
stock price.
Our operating results are likely to fluctuate thereby affecting our stock price
Our operating results may be subject to quarterly fluctuations as a result of
many different factors. Some of those factors include:
1) General economic conditions in the United States and abroad that can affect
capital spending decisions of our customers.
2) Decreased demand for our Promina circuit switched products due to a decline
in the markets for our technologies. We expect that in the future, net sales of
our Promina products will remain below what we experienced in previous years.
The market for circuit switched networking products appears to be decreasing,
possibly substantially, as commercial customers in the United States initially
and worldwide thereafter increasingly adopt packet or "broadband" technologies.
We cannot predict the speed at which the transition from circuit to packet
technologies will occur. The transition may occur more rapidly than we have
anticipated, which would cause quarterly fluctuations in product sales to
increase and could have other adverse effects on our financial results.
3) Market conditions including increased competition from our competitors' new
or enhanced products or the entry of new competitors in the markets we target.
4) Increases or decreases in our operating expense. Most of our expenses are
fixed, rather than variable. As a result, any shortfall in revenue for a quarter
may materially impact our financial condition and results of operations.
5) Delays in introducing our new products to the market.
6) Our inability to ship products as ordered. This could be due to many factors
such as a shortage or delay in receiving component parts or other failures by
third party suppliers, or customers canceling orders or postponing shipments.
Our customers, including resellers, have the contractual right to delay
scheduled order delivery dates with minimal penalties and to cancel orders
within specified time frames with no penalty. Delays or cancellations make it
difficult to predict when an order may actually ship.
7) Our lack of backlogged product orders at the beginning of each quarter.
Historically, the majority of our revenue in each quarter has resulted from
orders received and shipped in that quarter. In the past fiscal year, we have
not started a quarter with a sufficient amount of backlogged orders to meet the
sales forecast for that quarter. Because many smaller networking equipment
companies have the same ordering patterns yet still see increased revenue
growth, we do not believe that backlog is necessarily indicative of future
revenue levels. Without a backlog, we have been forced to schedule production
and commit to 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 our orders historically have been received and filled
in the last month of the quarter. This ordering pattern creates a significant
risk of carrying too much or too little 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 we have available to ship, our
operating results for that or subsequent quarters would be adversely affected.
While it would be extremely difficult to list all the factors that can affect
revenues in a quarter or a fiscal year, the factors listed can have a
significant effect. Because of possible fluctuations resulting from these
various factors, results of operations in any one-quarter do not necessarily
indicate what results can be expected in future quarters. Future declines in
networking product sales for any reason could have a material adverse effect on
our business, financial condition or results of operations. Additionally, to the
extent that we do not achieve profitability in any given quarter or that our
forecasted revenue is below the expectations of the publicly traded markets, the
price of our common stock could fall, perhaps by a significant amount.
We are dependent in large part on the Promina product line until introduction of
net.com's SCREAM product line in full
Currently, we derive the majority of our product revenue from our Promina
product line, a circuit-based technology that will eventually be replaced
entirely by our packet based product line, net.com's SCREAM. We believe that
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circuit-based technology generally is becoming obsolete, but we cannot foresee
when this obsolescence will become complete. While we work to develop our SCREAM
product line, we are dependent upon our Promina products to generate the bulk of
our revenue. Upon introduction of SCREAM, it will take time to develop the
market for this product. Our ability to complete development of net.com's SCREAM
product line and to successfully introduce that product to the market could
materially affect our financial condition and results of operation.
The move from circuit to packet based products appears to be happening more
quickly in the commercial markets in the United States than elsewhere in the
world. As our largest market has traditionally been the United States, this is
where we have seen the largest drop-off in commercial product sales.
Consequently, international sales will continue to account for a significant
portion of our Promina 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. Unforeseen events in various
areas of the globe may have an adverse impact on us such as the recent economic
difficulties in Asia and Latin America. Further, our international markets are
served primarily by non-exclusive resellers who themselves may be severely
impacted by economic or market changes within a particular country or region.
Unforeseen or unpredictable changes in international markets could have an
adverse effect on our business, results of operations and financial condition.
Increased competition is likely in the future
The market for networking products is extremely competitive. Our specific
market, telecommunication equipment, is a highly competitive and dynamic market
characterized by the easy entrance of new start-up companies, rapid changes,
converging technologies and a worldwide migration from existing circuit
technology to the new packet based technologies. We compete directly both
internationally and domestically with many different companies, some of which
are large, established suppliers of end-to-end solutions such as Cisco, Lucent,
Nortel and others which are new start-up ventures. Many of the large suppliers
have greater financial, marketing and technical resources and offer a wider
range of networking products than we have. They are often able to devote greater
resources to the development, marketing and sale of their products and to use
large market capitalizations or significant cash to acquire other companies with
technology and/or products that are competitive with ours. They often can
compete favorably on price because their large product selection allows them to
decrease the price for any individual product without significantly impacting
their overall product margins. Small start-up ventures are better able to devote
all their resources to a particular product development unencumbered by the
requirements to support an existing product line. As a result of the market's
favorable reaction to recent initial public offerings by technology companies,
start-ups also often have large market capitalizations allowing them easy access
to capital which could be used for various growth activities including funding
competitive acquisitions. Through these acquisitions, competitors can obtain
strategic advantages that may adversely affect our business, financial condition
or results of operations.
To remain competitive, we need to develop new products that meet the
ever-changing needs of the networking market but that can be sold at a
competitive price. We also must enhance our current products to provide needed
features that increase the overall value proposition for the customer while
keeping the price competitive. Due to the competitive nature of the market and
the relative age of our current product offerings, we may not be able to
maintain prices for our products at levels that will sustain profitability over
the short or long term.
A significant portion of our revenue is generated from sales to the Federal
government
A significant portion of our revenue from both product and services comes from
contracts with the U.S. government, most of which do not include purchase
commitments. While the transition from circuit to packet technology is slower in
the Federal market than in the commercial market, orders from the U.S.
government may not continue at historical levels, and it is possible that we
will not be able to obtain orders from new commercial customers to make up any
shortfall. The Federal market is characterized by rapid consolidation of
companies serving this market. As our federal contracts come up for renewal, the
government is tending to favor larger companies that can assume the role we
currently hold as primary contractor making us a subcontractor to a prime. If we
cannot find larger federal companies to partner with us on renewal of our
federal contracts, we could see a decrease in U.S. government orders and
resulting revenue. In addition, as a subcontractor, we often cannot offer the
same array of products and services at the prices we have in the past. This
could lead to a decrease in sales and related gross margin on those sales.
Should U.S. government orders substantially decline, it could have a material
adverse effect on our business, results of operations and financial condition.
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Our inability to sign competitive resale partners internationally could
significantly affect future product and service revenue
Because the transition from circuit to packet technology is slower outside the
United States, we expect international sales will continue to account for a
significant portion of our Promina product sales in future periods. Resellers
whose territories correspond to a particular geographic region that is not
exclusive to that reseller generate most international sales. Resellers do not
have minimum purchase requirements that they must meet. While we require our
resellers to use their best efforts to resell our products, because our product
line is small, our resellers must often resell product lines from other
networking companies including our competitors such as Cisco, in order to
sustain a profit. Because of Cisco's size and dominant position in the network
equipment market, it is difficult to find a reseller who does not resell Cisco
products. Due to the difficulty of signing up resellers without pre-existing
competitive relationships, our resellers are not always successful in promoting
our products thereby impacting the sustainability of our international product
sales. If we cannot develop relationships with resellers that can effectively
market and sell our products and services, we may not be able to meet our
forecasted sales and revenue in future quarters.
Our Latin America sales may continue at depressed levels
Sales in Latin America have largely been through strategic international resale
partners, primarily IBM and Ericsson Networks, rather than through local
resellers. Our reseller relationship with IBM ended in late calendar 1997. In
Latin America, Ericsson Networks has focused on marketing and selling its own
internally developed products. The decline of these two relationships has
significantly impacted product revenue in Latin America. If we cannot find other
resale channels, our Latin American sales may continue at current or decreased
levels thereby impacting our business, results of operations and financial
condition.
Growth in revenue is predicated upon timely release and market acceptance of our
SCREAM broadband product line
Although we believe the circuit switched product market to be declining, we
believe there is significant opportunity for growth in the packet switched
product market. That is why we have focused our research and development
activities on our new SCREAM broadband product line. We cannot guarantee,
however, that broadband product markets will grow as fast as we expect nor can
we guarantee that the market will readily adopt our product. If we fail to
release our broadband products on time, if our products do not have the features
and capabilities that the broadband market is looking for, or if our products
can not be competitively priced then our broadband product line may not generate
the revenue that we currently expect. That failure could materially adversely
affect our business, results of operations and financial condition.
Our customers must focus on service creation and delivery for our new SCREAM
product to gain acceptance in the broadband access market
net.com's new SCREAM product focuses on allowing our customers to deliver
services to their customers. Service creation is a concept that is only just now
being seriously studied by our customers. While early indications are that this
is a significant product feature, if the move by our customers to adopt the
service creation model is slow or if our customers ultimately reject this as an
unneeded technology feature, then our SCREAM product may not be accepted or may
be accepted slowly by the broadband access market. In either case, a lack of
acceptance or a slower than anticipated acceptance could impact our forecasted
revenue.
If we are unable to hire qualified new employees or to retain existing
employees, then we may not be able to successfully manage our business
As with all technology companies, our success is dependent on being able to
attract and retain highly skilled engineers, managers and other key employees.
In particular, we have seen a large turnover in our direct sales force in North
America. This turnover has impacted our ability to sell products in the United
States. The current tight job market has made competition for employees very
intense for all employers. The large job growth in the San Francisco Bay Area
and the competition for employees from companies able to offer greater
compensation incentives through either options for stock with a perceived higher
growth value than net.com, or offering a large equity interest in a pre-IPO
start-up company has made it difficult for many departments in net.com including
Marketing and Engineering to attract and recruit new employees in a timely
manner. While we have put additional
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focus and resources into our recruitment activities and have taken steps
including compensation and other incentives that we hope will mitigate these
competitive advantages, we cannot say that in the current economy, our increased
efforts will substantially improve the recruitment and retention issues faced by
our company at this time. Our inability to attract, recruit and retain key
personnel, particularly engineers, sales and marketing employees, could impact
our ability to meet important company objectives such as product delivery
deadlines and sales targets. That in turn could significantly impact our
business, results of operations and financial condition.
Our need to obsolete our STM product line could impact revenue in future periods
Due to an inability to find parts needed to manufacture our STM product line, we
will be working with our customers to end of life this product line effective at
the end of fiscal year 2001. In the first quarter of fiscal 2001, STM accounted
for 6.3% of our product revenue. We are not planning on replacing the STM with
another product line for that market. If revenue generated from our new products
is not sufficient to compensate for revenues lost from STM product sales, the
phase out of the STM product could impact our results of operations and
financial condition in future periods.
We rely on a number of sole source suppliers for our component parts
For both net.com's Promina and new SCREAM product lines, we purchase key
components from single source suppliers, in particular, our back planes, ASICS
and power supplies. If one of these suppliers were no longer able to supply a
required component, it could result in our having to significantly reengineer
the affected product. Further, due to increased demand and a shortage of
capacity in the semiconductor industry, lead times for ordering parts have
increased. If we encounter shortages or delays in receiving ordered components
or if we are not able to accurately forecast our ordering requirements, this
could adversely impact our ability to ship ordered products and could ultimately
negatively impact our results of operations and financial condition.
We single source our manufacturing process so that a failure or delay by that
vendor could impact our ability to timely ship our products
We currently subcontract some testing and all product manufacturing to one
company, Solectron. Final test and assembly is generally performed at our
Fremont, California facility. While subcontracting creates substantial cost
efficiencies in the manufacturing process, it also exposes us to delays in
product shipments should Solectron be unable to perform under our contract. In
addition, should Solectron in some future period decide not to renew our
contract with them, it would be difficult for us to quickly transfer our
manufacturing requirements to another vendor likely causing substantial delays
in customer product shipments and impacting revenue and our results of
operations.
Our products have long sales cycles making it difficult to predict when a
customer will place an order and when to forecast revenue from the related sale
Our products are very complex pieces of networking equipment and represent a
significant capital expenditure to our customers. The purchase of our products
can have a significant impact on how a customer designs its network and provides
services either within its own organization or to an external customer.
Consequently, our customers often engage in extensive testing and evaluation of
products before purchase. There are also numerous financial and budget
considerations and approvals that often must be obtained before a customer will
issue a purchase order. As a result, the length of our sales cycle can be quite
long, up to a year in some cases. While customers may tell us that they are
planning to purchase our products, to ensure a purchase order is placed, we
often must incur substantial sales and marketing expense. If the order is not
placed in the quarter forecasted because approvals took longer than anticipated
by the customer, our sales may not meet forecast and revenues may be
insufficient in that quarter to meet expenses.
To maintain our competitive advantage, we need to protect our intellectual
property from infringement by others
Our future success is dependent upon our ability to develop new products
superior to those of our competitors. We have an aggressive program in place to
patent our intellectual property and protect it from infringement by
competitors. In addition, we take measures to protect our trade secret
information from disclosure by third parties and current and former employees.
Despite our concerted efforts in these areas, we cannot guarantee our patents
will issue or that we will be able to protect our trade secrets from disclosure.
Even if a patent does issue, we cannot
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guarantee that it will not later be found invalid or infringed without our
knowledge. In particular, with the movement of employees from competitor to
competitor, it may be inevitable that trade secret information will be disclosed
at some point and used in product development. Monitoring unauthorized use of
our technology and trade secrets is extremely difficult. If our technology or
trade secret information is disclosed to a competitor, it may not be possible
for us to prove infringement or misappropriation sufficiently for a court to
take actions necessary to protect us. If a competitor gained an advantage
through infringement and/or misappropriation of our trade secrets, it could
seriously impact our competitive position in the market and ultimately our
financial condition.
We have been subject, and may again be subject, to claims that our technology
infringes another's intellectual property
Over the past decade, many companies have developed a business model where they
seek to increase their revenues by claiming infringement of one or more of their
patents. A number of these companies are large with extensive patent portfolios
developed because of their actual monopoly or near monopoly positions in certain
markets. These companies approach other companies and attempt to coerce them
into a licensing agreement by threatening to use their resources and patent
portfolio in never ending claims of infringement against their many patents.
While we have patents in our portfolio that we consider valuable, we do not have
an extensive enough portfolio to easily defend against these accusations of
infringement. Even if the infringement claims are without merit, defending
against these claims is time consuming and expensive especially for a small
company such as net.com and takes us away from the focus of our business. In
every case, we may not be able to successfully negotiate a licensing agreement
or the third party may institute litigation against us. In addition, if we were
required to pay royalties to an ever-increasing number of companies, it could
impact our financial condition and results of operation.
We recently entered into a cross-licensing agreement with Lucent Technologies in
settlement of our cross claims of patent infringement. We are each licensed for
use of all patents relevant to our individual businesses.
We cannot guarantee that our acquisition of Convergence will prove successful
In the first quarter of fiscal 2001 we acquired Convergence Equipment Company.
The purchase of Convergence gives us voice over IP technology that can be sold
as a stand alone product or incorporated into our existing Promina product line
at a later date. We believe that adding the voice over IP feature will enhance
the value proposition for customers of our Promina products.
While the intent of this acquisition is to enhance our competitive position, we
cannot be certain that it will have this result. To be successful, we must
overcome risks associated with the acquisition including the possible inability
to integrate the Convergence technologies and products with our current and
future technologies and products, the possible loss of key Convergence
employees, our inability to successfully sell the Convergence product due to
competitive factors or our inability to complete development of the Convergence
product and successfully bring it to market in a timely manner. Failure to bring
the Convergence product to market in a timely manner could impact our ability to
maintain projected revenue levels. If the Convergent acquisition proves
unsuccessful, it could have an adverse effect on our business, financial
condition or results of operations.
We face greater credit risk from some of our new customers
Historically, our customers have tended to be large established companies who
either used our products to develop their own wide area network or were
telephone companies using our products to allow their customers to access their
regional or national network. In the past two years, our customers have changed
to now include smaller, start-up telecommunications companies. Because these
start-up companies typically do not have either long operating histories or
significant capitalization, traditional lending sources are often not available
to them. Because financing assistance from the manufacturer is often required to
consummate the transaction, these companies frequently make purchasing decisions
in part on the ability of an equipment manufacturer to provide financing
assistance to them in deploying their network infrastructure. We have had a
leasing program originally with Bank Boston and now with Marcap to assist these
customers with their financing requirements. This program includes a loss
sharing provision with the lessor. In addition, we entered into a loss sharing
agreement with one of our resellers wherein we share in a percentage of any loss
arising from a customer's failure to pay the reseller for our equipment. Both
these programs are for United States based companies only. Although we have not
experienced significant losses to date from customers failing to meet their
obligations, should a significant number of lessees or customers in any one loss
sharing pool or should one large lessee or customer default, it could have a
material adverse effect on our business, results of operations and financial
condition.
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We expect gross margins to decline over future periods
Due to increases in competition, material and labor costs, subcontractor costs
and changes in the mix of products we sell, we expect that our gross margins
could decrease in future quarters. Some of our new products may have lower gross
margins than our Promina product line. In addition, if product sales decrease so
that service revenue becomes a larger part of overall revenue, overall margin
may decrease as service products traditionally have lower margins. Further, to
the extent we expand our sales through product resellers, reseller sales
generally result in lower gross margins because of the need to build in a margin
for the reseller. Prices for our component parts are also increasing due to
increased demand and an overall shortage of capacity in the semiconductor
industry. Any one of these factors or all of them in combination may decrease
our product margins or our margins overall.
We need to continue to license products from third parties
We license some of our technology from third party suppliers. If the relevant
licensing agreement expires or is terminated without our being able to renew
that license, that failure to renew the license could impact our ability to
market the affected product and that, in turn, could materially impact our
results of operations and financial condition.
Sales of net.com's SCREAM product depends upon continued growth of the Internet
We expect our broadband product sales will grow in large part due to increasing
growth of the Internet. In addition, our SCREAM product is targeted at certain
markets, such as internet and application service providers, whose business
relies predominantly on the growth of the Internet. If the Internet does not
continue to grow, it would directly impact the market for broadband networking
equipment like SCREAM. In the future, it is possible that there will be problems
with the performance of Internet communications due to capacity limitations and
equipment or software failures. Should any of these failures be associated with
net.com equipment, our reputation as a supplier of reliable equipment would be
tarnished, whether justified or not. That could undermine our ability to sell
products into targeted markets.
Domestic or foreign regulations of telecommunications or the Internet could
impact our ability to sell our products
As a telecommunications networking equipment manufacturer, our customers
worldwide often work within a regulated environment. That in turn requires us to
develop products that meet their regulatory requirements. Regulations usually
vary to a certain extent from country to country. For example, in many
countries, our Promina products require homologation certification in order to
connect to the public networks. If we do not comply with existing or evolving
regulations or if our products fail to obtain appropriate regulatory approvals
where required, it would impact our ability to sell our products in those
markets.
In addition, there are currently few laws or regulations that govern access or
commerce on the Internet. If individual countries, or groups of countries acting
in concert began to impose regulations or standards on Internet access or
commerce including voice over IP, this could materially impact our ability to
sell our new SCREAM or SHOUTip products if the regulations or standards resulted
in decreased demand or increased costs for our products. This, in turn, could
have a material adverse effect on our business, results of operations and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash, cash equivalents and temporary cash
investments of $125.0 million as compared to $124.9 million at the end of fiscal
2000. Cash used by operations was $4.8 million in the first quarter of fiscal
2001 compared to $5.8 million used by operations in the comparable period from
the prior year. The quarter-over-quarter net $1.0 million decrease in cash used
in the first quarter of fiscal 2001 was principally due to a small increase in
accounts receivable as compared to a large increase in accounts receivable from
the comparable period, partially offset by a net loss in the first quarter of
fiscal 2001, compared to net income in the first quarter of fiscal 2000.
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Net cash used by investing activities in the first quarter of fiscal 2001 was
$21.4 million compared to net cash provided by investing activities of $10.5
million in the first quarter of fiscal 2000. Net cash used for investing
activities in the first quarter of fiscal 2001 consisted of additions to
property and equipment of $2.1 million, net purchases of temporary cash
investments of $16.5 million and $1.5 million in cash used to purchase
Convergence. Net cash provided by investing activities in the first quarter of
fiscal 2000 consisted primarily from the proceeds from the net sale of temporary
cash investments of $13.1 million offset by additions to property and equipment
of $1.9 million and additions to software production costs of $0.8 million.
Net cash provided by financing activities in the first quarter of fiscal 2001
was $9.5 million compared to net cash used for financing activities of $2.0
million in the first quarter of fiscal 2000. The $9.5 million increase was
primarily related to insurance proceeds of $10.0 million, the first payment
associated with the settlement of construction defects at our Fremont campus.
Pursuant to our settlement agreement, we will be eligible to receive additional
insurance proceeds as a function of our incurred costs for moving and
construction of replacement buildings. The affect of the insurance proceeds on
cash in the first quarter of fiscal 2001 was partially offset by the repurchase
of common stock.
The board of Directors re-authorized a share repurchase program in October of
1999. During the first quarter of fiscal 2001, 170,800 common shares at an
average price of $8.27 per common share were repurchased. We intend to continue
the share repurchase program in fiscal 2001 and from time to time will reenter
the market to repurchase shares.
We believe that our current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through the next 12 months.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has been no material change from the information as reported in the Form
10-K for the fiscal year ended March 31, 2000. Refer to the Quantitative and
Qualitative Disclosures section in the Form 10-K for fiscal year ended March 31,
2000 for information on the financial instruments.
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PART II.
OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-K
None
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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 14, 2000 /s/ Hubert A.J. Whyte
----------------------------------------
Hubert A.J. Whyte
President and Chief Executive Officer
/s/ John C. Batty
----------------------------------------
John C. Batty
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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