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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 March 31, 2004

 

OR


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ___________ to ___________


Commission file number: 0-30863

_____________________


NETWORK ENGINES, INC.

(Exact name of registrant as specified in its charter)

                               


Delaware

 

04-3064173

(State or other jurisdiction of incorporation)

 

(I.R.S. Employer       Identification No.)

   

25 Dan Road, Canton, MA

 

02021

(Address of principal executive offices)

 

(Zip Code)

   

(781) 332-1000

(Registrant's telephone number, including area code)

              

   


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 than 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  [  ]


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)     Yes  [X]  No  [  ]


As of May 1, 2004, there were 36,845,389 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.







 

NETWORK ENGINES, INC.

  
 

INDEX

  
    

PAGE NUMBER

   

 

 
 

PART I.  FINANCIAL INFORMATION

 

 
   

 

 
 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

 
   

 

 
  

CONDENSED CONSOLIDATED BALANCE SHEETS

 

1

  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

2

  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

3

  

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4

   

 

 
 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF

 

 
  

OPERATIONS AND FINANCIAL CONDITION

 

17

     
 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

47

     
  

ITEM 4. CONTROLS AND PROCEDURES

 

47

    
 

PART II.  OTHER INFORMATION

 

 
  

 

 
 

ITEM 1. LEGAL PROCEEDINGS

 

48

     
 

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

49

  

 

 
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

50

  

 

 
 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

50

  

 

 
 

SIGNATURES

 

51


PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS


NETWORK ENGINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

   

 

 
   
  

March 31,

 

September 30,

  

2004

 

2003

ASSETS

    
     

Current assets:

    

    Cash and cash equivalents

 

 $     35,084

 

 $     36,788

    Restricted cash

 

                  47

 

                  47

    Accounts receivable, net of allowances

 

           17,710

 

           13,948

    Inventories

 

           20,724

 

           14,937

    Prepaid expenses and other current assets

 

             1,191

 

             1,946

 

 

 

 

 

        Total current assets

 

           74,756

 

           67,666

 

 

 

 

 

Property and equipment, net

 

             1,528

 

             1,849

Goodwill

 

             7,769

 

             7,786

Intangible assets, net

 

                462

 

             4,310

Other assets

 

                291

 

                121

   

 

 

            Total assets

 

 $     84,806

 

 $     81,732

   

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

    
     

Current liabilities:

    

    Accounts payable

 

 $     15,364

 

 $     13,864

    Accrued compensation and other related benefits

 

             1,785

 

             1,365

    Other accrued expenses

 

             2,030

 

             1,398

    Current portion of accrued restructuring and other charges

 

                130

 

                218

    Deferred revenue

 

                830

 

                603

   

 

 

        Total current liabilities

 

           20,139

 

           17,448

   

 

 

Long-term portion of accrued restructuring and other charges

 

-

 

                  60

Commitments and contingencies (Note 7)

    
     

Stockholders' equity:

  

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 39,339,863 and 38,183,158 shares issued; 36,778,005 and 35,621,300 shares outstanding at March 31, 2004 and September 30, 2003, respectively

 

                393

 

                382

    Additional paid-in capital

 

         177,242

 

         176,061

    Accumulated deficit

 

       (110,045)

 

       (108,948)

    Deferred stock compensation

 

                (85)

 

              (433)

Treasury stock, at cost, 2,561,858 shares at March 31, 2004 and September 30, 2003

 

           (2,838)

 

           (2,838)

 

 

 

 

 

        Total stockholders' equity

 

           64,667

 

           64,224

 

  

 

 

 

            Total liabilities and stockholders' equity

 

 $     84,806

 

 $     81,732

 

  

   
 

 

   

The accompanying notes are an integral part of the condensed consolidated financial statements.



#





NETWORK ENGINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

         
  

Three months ended March 31,

 

Six months ended March 31,

 

 

2004

 

2003

 

2004

 

2003

 

 

   

 

   
         

Net revenues

 

 $        35,619

 

 $       19,427

 

 $       71,470

 

 $       25,415

         

Cost of revenues:

 

   

 

   

  Cost of revenues

 

           29,287

 

           15,352

 

           58,050

 

           19,974

  Cost of revenues stock compensation

 

                  13

 

                  14

 

                  27

 

                  28

         

  Total cost of revenues

 

           29,300

 

           15,366

 

           58,077

 

           20,002

 

 

   

 

   

  Gross profit

 

             6,319

 

             4,061

 

           13,393

 

             5,413

 

 

   

 

   

Operating expenses:

 

   

 

   

  Research and development

 

             1,486

 

                917

 

             2,715

 

             1,711

  Selling and marketing

 

             2,147

 

             1,564

 

             4,393

 

             2,439

  General and administrative

 

             1,619

 

             1,899

 

             3,340

 

             2,882

  Stock compensation

 

                127

 

                279

 

                338

 

                471

  Amortization of intangible assets

 

                  31

 

                254

 

                234

 

                254

  Impairment of intangible assets

 

                   -   

 

                   -   

 

             3,614

 

                   -   

  Restructuring and other charges

 

                   -   

 

                (30)

 

                   -   

 

                884

 

 

   

 

   

  Total operating expenses

 

             5,410

 

             4,883

 

           14,634

 

             8,641

 

 

   

 

   
 

 

   

 

   

Income (loss) from operations

 

                909

 

              (822)

 

           (1,241)

 

           (3,228)

Interest and other income, net

 

                  66

 

                138

 

                144

 

                365

 

 

   

 

   

Net income (loss)

 

 $             975

 

 $          (684)

 

 $       (1,097)

 

 $       (2,863)

 

 

   

 

   

Net income (loss) per share - basic

 

 $           0.03

 

 $         (0.02)

   

 $         (0.03)

 

 $         (0.09)

Net income (loss) per share - diluted

 

 $           0.02

 

 $         (0.02)

 

 $         (0.03)

 

 $         (0.09)

         

Shares used in computing basic net income (loss) per share

 

           36,578

 

           33,524

 

           36,232

 

           32,050

Shares used in computing diluted net income (loss) per share

 

           40,537

 

           33,524

 

           36,232

 

           32,050

 

 

   

 

   

The accompanying notes are an integral part of the condensed consolidated financial statements.










NETWORK ENGINES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

     
  

Six months ended March 31,

 

 

2004

 

2003

 

 

   

Cash flows from operating activities:

 

   

  Net loss

 

 $             (1,097)

 

 $             (2,863)

  Adjustments to reconcile net loss to net cash used in

 

   

   operating activities:

 

   

    Depreciation and amortization

 

                     871

 

                  1,134

    Provision for doubtful accounts

 

                       46

 

                       32

    Reversal of provision for stockholder notes receivable

 

                       -   

 

                   (228)

    Provision for uncollectible sub-tenant receivables

 

                       -   

 

                     138

    Stock compensation

 

                     365

 

                     499

    Interest on notes receivable from stockholders

 

                       -   

 

                       (7)

    Impairment of intangible assets

 

                  3,614

 

-

    Changes in operating assets and liabilities, net of effects of acquisition:

 

   

      Accounts receivable

 

                (3,808)

 

                (4,061)

      Inventories

 

                (5,787)

 

                (1,056)

      Prepaid expenses and other current assets

 

                     755

 

                     231

      Accounts payable

 

                  1,500

 

                  2,184

      Accrued expenses

 

                     921

 

                     482

      Deferred revenue

 

                     227

 

                     259

 

 

   

        Net cash used in operating activities

 

                (2,393)

 

                (3,256)

 

 

   

Cash flows from investing activities:

 

   

  Purchases of property and equipment

 

                   (316)

 

                   (234)

  Sales of short-term investments

 

                       -   

 

                  8,546

  Refunds and repayments of restricted cash under guarantee agreement

 

                       -   

 

                     540

  Purchases of other assets

 

                   (170)

 

                         3

  Acquisition of TidalWire, net of cash acquired

 

                       -   

 

              (11,101)

  Payments of transaction costs

 

                       -   

 

                (2,129)

 

 

   

        Net cash used in investing activities

 

                   (486)

 

                (4,375)

 

 

   

Cash flows from financing activities:

 

   

  Payments on capital lease obligations and notes payable

 

                       -   

 

                     (11)

  Collection of notes receivable from stockholders

 

                       -   

 

                         4

  Proceeds from issuance of common stock

 

                     760

 

                     244

  Net proceeds from settlement of lawsuit

 

                     415

 

                       -   

  Acquisition of treasury stock

 

                       -   

 

                   (312)

 

 

   

        Net cash provided by (used in) financing activities

 

                  1,175

 

                     (75)

 

 

   

Net decrease in cash and cash equivalents

 

                (1,704)

 

                (7,706)

Cash and cash equivalents, beginning of period

 

                36,788

 

                46,552

 

 

   

Cash and cash equivalents, end of period

 

 $             35,084

 

 $             38,846

 

 

   

The accompanying notes are an integral part of the condensed consolidated financial statements.



#





NETWORK ENGINES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION

  

The accompanying condensed consolidated financial statements have been prepared by Network Engines, Inc. (“Network Engines” or the “Company”) in accordance with generally accepted accounting principles and 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. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes included in the Company’s 2003 Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission.

 

The information furnished reflects all adjustments, which, in the opinion of management, are of a normal recurring nature, unless otherwise disclosed, and are considered necessary for a fair presentation of results for the interim periods. It should also be noted that results for the interim periods are not necessarily indicative of the results expected for the full year or any future period.

 

The preparation of these condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates reflected in these financial statements include accounts receivable and sales allowances, inventory valuation, warranty reserves, acquisition accounting, valuation of intangible assets and goodwill, restructuring and other charges, accounting for stock-based compensation and valuation of deferred tax assets. Actual results could differ from those estimates.


2.  SIGNIFICANT ACCOUNTING POLICIES


Recent Accounting Pronouncements

 


In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to January 31, 2003, FIN 46, as amended by FIN 46R, provisions were required to be adopted by the Company in the three months ended March 31, 2004. The Company does not have any financial interests in variable interest entities created after January 31, 2003. The adoption of FIN 46R did not have a material impact on the Company's fi nancial position or its results of operations.


In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer of equity classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and for existing financial instruments after October 1, 2003. The adoption of SFAS 150 did not have an impact on the Company’s financial position or its results of operation.









NETWORK ENGINES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS