U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-25350
NETWORK EXPRESS, INC.
(Exact name of small business issuer as specified in its charter)
Michigan 38-2917505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
4251 Plymouth Road, Ann Arbor, Michigan 48105
(Address of principal executive offices)
(313) 761-5005
(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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.[ X ] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, no par value, 10,230,089 shares as of March 31, 1996.
Transitional Small Business Disclosure Format: [ ] Yes [ X ] No
<PAGE>
NETWORK EXPRESS, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1996
and December 31, 1995
Consolidated Statements of Operations for the
Quarters Ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1996 and 1995
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORK EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
---------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,506,648 $2,733,222
Short-term investments 15,319,018 18,069,301
Accounts receivable, net of allowance for
doubtful accounts of $110,889 and $92,284
at March 31, 1996 and December 31, 1995,
respectively 2,602,802 2,131,492
Inventories 6,455,403 4,824,540
Prepaid expenses and other 266,709 355,528
---------- ---------
Total current assets 26,150,580 28,114,083
Property and equipment, net 1,576,544 1,497,586
Goodwill 2,434,605 2,539,605
Other assets 139,647 129,096
---------- ----------
$30,301,376 $32,280,370
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,602,060 $2,217,999
Accrued liabilities 2,100,709 2,009,294
---------- ----------
Total current liabilities 4,702,769 4,227,293
---------- ----------
Shareholders' equity:
Preferred stock, no par value, 100,000 shares
authorized, none outstanding -- --
Common stock, no par value, $.125 stated value,
20,000,000 shares authorized; 10,230,089 and
10,322,339 shares issued and outstanding at
March 31, 1996 and December 31, 1995,
respectively 1,278,761 1,290,292
Additional paid-in-capital 37,922,268 38,314,361
Note receivable from officer -- (151,050)
Cumulative translation adjustment (64,070) (15,987)
Accumulated deficit (13,538,352) (11,384,539)
------------ ------------
Total shareholders' equity 25,598,607 28,053,077
------------ ------------
$30,301,376 $32,280,370
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters Ended March 31,
------------------------
1996 1995
--------- ----------
(unaudited)
Net sales $3,177,664 $4,543,299
Cost of sales 1,621,250 2,404,764
---------- ----------
Gross Profit 1,556,414 2,138,535
---------- ----------
Operating expenses:
Research and development 1,677,092 863,288
Sales and marketing 1,595,140 640,130
General and administrative 577,012 255,624
---------- -----------
Total operating expenses 3,849,244 1,759,042
---------- -----------
Income (loss) from operations (2,292,830) 379,493
Interest income 249,467 34,682
----------- ---------
Income (loss) before income taxes (2,043,363) 414,175
Provision for income taxes 110,450 40,000
----------- ---------
Net income (loss) $(2,153,813) $374,175
============ =========
Net income (loss) per common and
common equilvalent share ($0.20) $0.05
============ =========
Weighted average number of common and
common equilvalent shares outstanding 10,653,981 7,925,506
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NETWORK EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarters Ended March 31,
------------------------
1996 1995
--------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $(2,153,813) $374,175
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 180,370 52,476
Goodwill amortization 130,650 --
Change in operating assets and
liabilities:
Accounts receivable (493,001) (169,724)
Inventories (1,791,889) 262,418
Prepaid expenses and other 85,288 (16,564)
Other assets (15,923) (13,726)
Accounts payable 382,914 197,131
Accrued liabilities 106,516 (39,319)
---------- ----------
Net cash provided by (used in) operating
activities (3,568,888) 646,867
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (140,335) (212,740)
Fivemere acquisition costs (25,650) --
Purchase of short-term investments (199,717) --
Sale of short-term investments 2,950,000 --
----------- ---------
Net cash provided by (used in) investing
activities 2,584,298 (212,740)
---------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 11,376 27,750
Repayment of officer note receivable 151,050 1,436
Repurchase of common stock (415,000) --
---------- ----------
Net cash provided by (used in) financing
activities (252,574) 29,186
Effect of exchange rate changes on cash 10,590 --
----------- -----------
Decrease (increase) in cash and cash
equivalents (1,226,574) 463,313
Cash and cash equivalents, beginning of period 2,733,222 2,223,130
----------- ----------
Cash and cash equivalents, end of period $1,506,648 $2,686,443
========== ==========
Supplemental disclosure of cash flow information:
Taxes Paid $60,000 $25,000
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements of Network Express, Inc. have
been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The
information included in this report should be read in conjunction with the
financial statements for the year ended December 31, 1995 and notes thereto
included in the Company's Annual Report on Form 10-KSB.
In the opinion of management, the accompanying interim consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the periods
presented. The results for the quarter ended March 31, 1996 are not
necessarily indicative of the results to be expected for any future period
or for the entire year.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
1996 1995
---- ----
(unaudited)
Raw materials and purchased parts $1,055,371 $367,641
Work in process 79,790 91,879
Finished goods 5,320,242 4,365,020
---------- ---------
$6,455,403 $4,824,540
========== ==========
NOTE 3 - GEOGRAPHIC SALES INFORMATION
The Company's net sales by geographic region were as follows:
Quarters Ended March 31,
------------------------
1996 1995
---- ----
(unaudited)
Europe $2,449,675 $ --
United States 339,812 329,699
Japan 388,177 4,213,600
----------- -----------
$3,177,664 $4,543,299
========== ==========
<PAGE>
NETWORK EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
From its inception in March 1990 through 1991, the Company was
principally engaged in product research and development. In early 1992,
the Company released its first commercial product in Japan and followed with
a release in the United States later that year. Since that time, the
Company's sales have increased due primarily to market acceptance of the
Company's products in Japan, which are sold through a sole distributor,
Soliton Systems K.K. ("Soliton").
On November 17, 1995, the Company acquired Fivemere Limited located
in the United Kingdom. Fivemere is principally engaged in the design,
development, marketing and support of ISDN based backup products for leased
line networks used by large businesses and organizations in the financial
information services market. The acquisition was accounted for as a
purchase and, accordingly, the results of operations of Fivemere are
included in the Company's consolidated financial statements since November
17, 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data stated as a percentage of net sales.
Quarters Ended
March 31,
--------------
1996 1995
---- ----
Net sales 100.0% 100.0%
Gross margin 49.0 47.1
Research and development 52.8 19.0
Sales and marketing 50.2 14.1
General and administrative 18.2 5.6
Income (loss) from operations (72.2) 8.4
Other income 7.9 0.8
Net income (loss) (67.8)% 8.2%
Net Sales. Net sales for the quarter ended March 31, 1996 were $3.2
million, a decrease of 30% from net sales of $4.5 million for the quarter
ended March 31, 1995. Sales of the Company's products in Japan represented
$388,000 or 12% of net sales for the quarter ended March 31, 1996 compared
with sales of $4.2 million or 93% of net sales for the same period in 1995.
Sales in Europe, resulting primarily from the sale of Fivemere products,
respresented $2.4 million or 77% of net sales in the quarter ended March 31,
1996, with the balance of net sales in both quarters derived primarily from
the United States .
The decrease in sales to Japan was primarily due to the completion,
in the fourth quarter of 1995, of a large internal networking project at
Nippon Telephone & Telegraph, the principal Japanese telecommunications
carrier. The project accounted for over 50% of the Company's sales to Japan
in 1995. Additionally, Soliton had sufficient inventory to cover its
customer needs during the first quarter of 1996.
The Company's United States and European sales initiatives are in
the early stages of development. The Company anticipates that sales costs
will continue to increase in future periods as the United States and
European sales channels are developed. The Company continues to attempt to
enhance the breadth and scope of its product offerings to better appeal to
its customers in all markets. There can be no assurance that the Company
<PAGE>
will be successful in these efforts or that the expected increase in costs
from these initiatives will not adversely affect the Company's results of
operations if the resulting revenues are not sufficient to meet the
additional costs.
Gross Profit. Gross profit as a percentage of net sales increased
to 49.0% for the quarter ended March 31, 1996 from 47.1% for the same period
in 1995. The increase in gross profit as a percentage of net sales was the
result of the sale of a larger proportion of Fivemere products which have a
higher gross margin. The increase was partially offset by lower gross
profit on sales in the United States and Japan due to lower volumes, mix of
products sold and reduced pricing on current products in anticipation of new
product pricing.
The gross profit in any particular period is dependent upon the mix
and volume of products sold and the channels of distribution. As a result,
gross profit can vary within a wide range. Because of a favorable mix of
variables during the quarter, margins are at the high end of the range when
compared to prior periods. Gross margins earned in the future may not be
maintained at this level and increased inventories resulting from lower
sales in the fourth quarter of 1995 and first quarter of 1996 may require
price reductions which would unfavorably impact gross profit.
Research and Development. Research and development expense was $1.7
million and $863,000, or 52.8% and 19.0% of net sales in the quarters ended
March 31, 1996 and 1995, respectively. The absolute dollar increase in
research and development expenditures was principally attributable to
product development work undertaken to respond to needs of the marketplace.
The primary components of such increase were the addition of full-time
personnel, the use of consultants in connection with product development and
the purchase of computer hardware and software used for product development.
Under generally accepted accounting principles, the Company's research and
development costs were expensed as incurred. The Company anticipates that
it will continue to commit substantial additional resources to research and
development in the future.
Sales and Marketing. Sales and marketing expense was $1.6 million
and $640,000, or 50.2% and 14.1% of net sales in the quarters ended March
31, 1996 and 1995, respectively. The absolute dollar increase in sales and
marketing expense was primarily attributible to staff additions made to
accelerate market penetration in the United States and Europe. Sales and
marketing expense is expected to increase in absolute dollars in 1996. For
example, four new employees were hired for the Company's sales office in
Munich, Germany; and the Company has hired a new Vice President of Sales for
Asia to develop non-Japanese markets.
General and Administrative. General and administrative expense was
$577,000 and $256,000, or 18.2% and 5.6% of net sales in the quarters ended
March 31, 1996 and 1995, respectively. The absolute dollar increase in
general and administrative expense was primarily due to increases in
administrative personnel necessary to support the growth of the Company and
in professional fees and other expenses associated with being a public
company.
Other Income. Other income of $249,000 and $35,000 for the quarters
ended March 31, 1996 and 1995, respectively, consists primarily of interest
earned on investment of the proceeds of the Company's public offerings of
Common Stock in June 1994 and May 1995.
Income Taxes. The income tax provision for the quarter ended March
31, 1996 relates primarily to foreign taxes incurred as a result of income
earned in foreign locations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company's principal sources of liquidity
included cash, cash equivalents and short-term investments totaling $16.8
million; and the Company had no bank indebtedness.
For the quarter ended March 31, 1996, the Company used $3.6 million
in cash to fund operating activities, primarily as a result of operating
losses and increased inventories. The increase in inventories was mainly
the result of lower than expected net sales in the fourth quarter of 1995
and first quarter of 1996 which caused inventories of certain products to be
higher than planned. The increase in inventories was also due to the
purchase of computer platforms for resale to customers and for the on-going
long-term support of certain Japanese customers occasioned by the
announcement by the Company's sole source supplier of such platforms that it
was discontinuing production of the platform. For the quarter ended March
31, 1995, cash of $647,000 was generated by operating activities primarily
as a result of income from operations and a decrease in inventories. The
decrease in inventories was due to the Company's increased use of contract
manufacturers.
The Company expects that developing a market for its products in
Europe, as well as other international markets, will require investment of
capital to develop the potential for sales growth, which it presently
expects to finance from its existing cash and from cash generated from
operations. International business subjects its participants to added
burdens and risks, including currency fluctuations, unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles and added complexity in complying
with legal requirements. Fivemere's operations are conducted principally in
the United Kingdom. As a result of the acquisition of Fivemere, it is
expected that a significant portion of the Company's consolidated revenue
and expenses in the future will be transacted in British pounds.
Additionally, the Company has a supply contract with a German manufacturing
firm to acquire certain products with payment due in German marks. Although
it is impossible to predict future exchange rate fluctuations between the
U.S. dollar and other currencies, it can be anticipated that to the extent
the U.S. dollar strengthens or weakens against other currencies, the
Company's reported results of operations will be correspondingly lower or
higher than they would have been with a stable foreign currency
relationship.
The Company believes that cash generated from operations and its
current cash and cash equivalents will provide sufficient cash resources to
finance its operations and currently projected capital expenditures through
December 31, 1996.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule (Edgar version only).
(b) The Company filed an amendment to a current report on Form 8-K/A during
the quarter ended March 31, 1996 relating to the acquisition of Fivemere.
All other items omitted are not applicable or the answers thereto are
negative.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NETWORK EXPRESS, INC.
/S/ John R. Ternes
Date: May 14, 1996 ---------------------------
John R. Ternes
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer
and a duly authorized officer of the
Registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,506,648
<SECURITIES> 15,319,018
<RECEIVABLES> 2,602,802
<ALLOWANCES> 110,889
<INVENTORY> 6,455,403
<CURRENT-ASSETS> 26,150,580
<PP&E> 3,065,412
<DEPRECIATION> 1,488,868
<TOTAL-ASSETS> 30,301,376
<CURRENT-LIABILITIES> 4,702,769
<BONDS> 0
<COMMON> 1,278,761
0
0
<OTHER-SE> 24,319,846
<TOTAL-LIABILITY-AND-EQUITY> 30,301,376
<SALES> 3,177,664
<TOTAL-REVENUES> 3,177,664
<CGS> 1,621,250
<TOTAL-COSTS> 1,621,250
<OTHER-EXPENSES> 3,849,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,043,363)
<INCOME-TAX> 110,450
<INCOME-CONTINUING> (2,153,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,153,813)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
