10-Q/A 1 d10qa.htm FORM 10-Q/A FORM 10-Q/A
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q/A
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2000
 
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
(State or other jurisdiction
of incorporation)
04-3064173
(I.R.S. Employer
Identification No.)
 
25 Dan Road, Canton, MA
(Address of principal
executive offices)
02021
(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
 
          As of February 1, 2001, there were 34,986,659 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.
 
 
NETWORK ENGINES, INC.
 
INDEX
 

              PAGE
NUMBER
 
EXPLANATORY NOTE      1
 

PART I.    FINANCIAL INFORMATION
 

ITEM 1.      FINANCIAL STATEMENTS     
 
       CONDENSED CONSOLIDATED BALANCE SHEETS      2
 
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS      3
 
       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      4
 
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS      5
 
SIGNATURE      9

 

Network Engines, Inc. (the "Company") is filing this amendment to its Quarterly Report on Form 10-Q for the three months ended December 31, 2000 (the "Original 10-Q") in order to remove pro-forma information regarding the conversion of the Company's convertible redeemable preferred stock into common stock, which occurred upon the effectiveness of the Company's initial public offering in July 2000. This pro-forma information was included in the Company's condensed consolidated statement of operations and in Note 3 to the condensed consolidated financial statements, each contained in Item 1 of the Original 10-Q. In addition, the Company is amending Item 1 of the Original 10-Q to include in Note 5 of its condensed consolidated financial statements information regarding the Company's ongoing legal proceedings. This amendment also amends Item 1 of the Original 10-Q to make a minor clarification change to Note 6 of the Company's condensed consolidated financial statements for the three months ended December 31, 2000. Item 1, as amended, is hereby provided in its entirety.

 

 

 

 
PART I.    FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
NETWORK ENGINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
       December 31,
2000
      September 30,
2000
       (unaudited)
ASSETS          
                 
Current assets:          
          Cash and cash equivalents      $113,446        $112,382  
          Restricted cash      47        47  
          Accounts receivable, net of allowance      5,468        11,805  
          Inventories      5,561        6,600  
          Prepaid expenses and other current assets      1,419        1,031  
          Due from contract manufacturer      1,432        7,113  
     
     
  
                    Total current assets      127,373        138,978  
Property and equipment, net      8,003        7,098  
Goodwill and intangible assets      2,542        —    
Other assets      349        136  
     
     
  
                    Total assets      $138,267        $146,212  
     
     
  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
                 
 
Current liabilities:          
          Accounts payable      $  16,253        $    6,906  
          Due to contract manufacturer      5,832        —    
          Accrued compensation and other related benefits      962        1,773  
          Other accrued expenses      570        1,077  
          Deferred revenue      665        827  
          Current portion of capital lease obligations and notes payable      71        63  
     
     
  
                    Total current liabilities      24,353        10,646  
Capital lease obligations and notes payable, net of current portion      56        90  
 
Stockholders’ equity:          
          Preferred stock      —          —    
          Common stock      348        342  
          Additional paid-in capital      180,355        171,314  
          Accumulated deficit      (49,777 )      (23,915 )
          Note receivable from stockholder      (96 )      (94 )
          Deferred stock compensation      (16,972 )      (12,171 )
     
     
  
                    Total stockholders’ equity      113,858        135,476  
     
     
  
                    Total liabilities and stockholders’ equity      $138,267        $146,212  
     
     
  
 
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
December 31,
       2000
      1999
Net revenues      $    6,894        $  4,415  
Cost of revenues:          
          Cost of revenues (excluding stock compensation)      5,196        2,613  
          Cost of revenues stock compensation      91        10  
          Inventory write-down      14,965        —   
     
     
  
                    Total cost of revenues      20,252        2,623  
                    Gross profit (loss)      (13,358 )      1,792  
Operating expenses:          
          Research and development      3,874        1,174  
          Selling and marketing      6,501        1,615  
          General and administrative      2,577        432  
          Stock compensation (excluding cost of revenues stock compensation)      1,254        187  
          Amortization of goodwill and intangible assets      150        —   
     
     
  
                    Total operating expenses      14,356        3,408  
     
     
  
Loss from operations      (27,714 )      (1,616 )
Interest income, net      1,852        30  
     
     
  
Net loss      (25,862 )      (1,586 )
Accretion of redeemable convertible preferred stock      —         (810 )
     
     
  
Net loss attributable to common stockholders      $(25,862 )      $(2,396 )
     
     
  
Net loss per common share—basic and diluted      $    (0.76 )      $  (0.70 )
     
     
  
Shares used in computing net loss per common share—basic and diluted      33,862        3,417  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
NETWORK ENGINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
       Three months ended
December 31,
       2000
      1999
Cash flows from operating activities:          
     Net loss      $(25,862 )      $(1,586 )
     Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
          Depreciation and amortization      1,242        106  
          Provision for inventory reserve      15,055        83  
          Provision for doubtful accounts      575        30  
          Stock compensation      1,345        197  
          Interest on note receivable from stockholder      (2 )      —   
          Changes in operating assets and liabilities, net of effects of acquisition:          
               Accounts receivable      5,762        (220 )
               Inventories      (14,016 )      (560 )
               Prepaid expenses and other current assets      (360 )      (284 )
               Due from contract manufacturer      5,681        —   
               Accounts payable      9,143        1,206  
               Due to contract manufacturer      5,832        —   
               Accrued compensation and related benefits and other accrued expenses      (1,318 )      (121 )
               Deferred revenue      (162 )      (8 )
     
     
  
                    Net cash provided by (used in) operating activities      2,915        (1,157 )
Cash flows from investing activities:          
          Purchases of property and equipment      (1,943 )      (422 )
          Deposit of restricted cash      —         (279 )
          Increase in other assets      (213 )      (83 )
          Cash of business acquired, net of acquisition expenses      (30 )      —   
     
     
  
                    Net cash used in investing activities      (2,186 )      (784 )
Cash flows from financing activities:          
          Proceeds from notes payable      —         2,205  
          Payments on capital lease obligations and notes payable      (26 )      (2,070 )
          Proceeds from issuance of common stock      361        71  
          Proceeds from issuance of redeemable convertible preferred stock, net of
               issuance costs		      —         25,176  
     
     
  
                    Net cash provided by financing activities      335        25,382  
     
     
  
Net increase in cash and cash equivalents      1,064        23,441  
Cash and cash equivalents, beginning of period      112,382        1,435  
     
     
  
Cash and cash equivalents, end of period      $113,446        $24,876  
     
     
  
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
NETWORK ENGINES, INC.
 
NOTES TO 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 2000 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 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. Actual results could differ from those estimates.
 
2.    SIGNIFICANT ACCOUNTING POLICIES
 
Recent Accounting Pronouncements
 
          In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). This bulletin summarizes certain views of the staff of the Securities and Exchange Commission (the “Staff”) on applying generally accepted accounting principles to revenue recognition in financial statements. The Staff believes that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured. In June 2000, the Staff issued Staff Accounting Bulletin No. 101B, “Second Amendment: Revenue Recognition in Financial Statements,” (“SAB 101B”). SAB 101B delays the implementation of SAB 101 until the fourth quarter of the Company’s fiscal year 2001. The Company does not expect the application of SAB 101 to have a material impact on the Company’s financial position or results of operations.
 
Comprehensive Loss
 
          During each period presented, comprehensive loss is equal to net loss.
 
Segment Reporting
 
          During each period presented, the Company operated in a single business segment, primarily in the United States.
NETWORK ENGINES, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 
3.    NET LOSS PER SHARE
 
          Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period, excluding shares of common stock subject to repurchase by the Company (“restricted shares”). Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of shares of common stock and potential common stock outstanding during the period, if dilutive. Potential common stock includes restricted shares and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of redeemable convertible preferred stock. Because the inclusion of potential common stock would be anti-dilutive for all periods presented, diluted net loss per share is the same as basic net loss per share.
 
          The following table sets forth the potential common stock excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive (in thousands):
 

       As of
December 31,
       2000
      1999
Options to purchase common stock      5,816      2,844
Warrants to purchase common stock      1,729      2,350
Unvested restricted common stock      472      675
Redeemable convertible preferred stock      —      21,448
     
  
       8,017      27,317
     
  

 
4.    INVENTORIES
 
          Inventories consisted of the following (in thousands):
 
       December 31,
2000
      September 30,
2000
Raw materials      $2,018      $3,524
Work in process      95      847
Finished goods      3,448      2,229
     
  
       $5,561      $6,600
     
  
 
5.    CONTINGENCIES
 
          On December 29, 1999, a former employee, George Flate, commenced a lawsuit against the Company, a current officer and director and a former officer and director in Suffolk Superior Court, a Massachusetts state court. Mr. Flate alleges that he was unlawfully terminated as Vice President of OEM Sales in an effort to deprive him of commission payments. Mr. Flate is seeking undisclosed damages based on two contractual claims relating to his employment, although the Company anticipates that Mr. Flate will claim damages in the multi-million dollar range. Specifically, Mr. Flate is alleging a breach of the implied covenant of good faith and fair dealing against the Company and a claim of intentional interference with contractual relations against the current and former officers of the Company named in the lawsuit. Both of these claims are based on Mr. Flate’s allegations that he is entitled to commissions from several transactions that were negotiated after Mr. Flate was no longer with the Company. Mr. Flate was employed by the Company for approximately one year. Currently, the matter is in the early stages of discovery. Although the Company believes that these claims are without merit and intends to vigorously defend against each claim asserted in the complaint, an adverse resolution of either of these claims could require the payment of substantial monetary damages. Moreover, the Company’s defense against these claims might result in the expenditure of significant financial and managerial resources.
 
6.    ACQUISITION OF IP PERFORMANCE
 
          On November 8, 2000, the Company completed its acquisition of IP Performance, Inc. (“IP Performance”), a developer of network acceleration technology, through the exchange of 128,693 shares of Network Engines common stock for all outstanding shares of IP Performance capital stock. The acquisition was accounted for using the purchase method of accounting. Accordingly, the fair market value of the acquired assets and assumed liabilities have been included in the Company’s financial statements as of the acquisition date and the results of IP Performance operations have been included in the Company’s financial statements thereafter. The purchase price of approximately $2,540,000, assumed net liabilities of approximately $94,000 and acquisition expenses of approximately $58,000 resulted in goodwill and intangible assets of approximately $2,692,000. The Company is amortizing the goodwill and intangible assets over a three-year period resulting in approximately $150,000 of amortization during the three months ended December 31, 2000. The Company’s pro forma statements of operations prior to the acquisition would not differ materially from reported results.
 
          The Company also issued 321,756 shares of restricted common stock to key employee shareholders of IP Performance. These shares are restricted as to sale and such restrictions lapse in three equal annual installments beginning on November 8, 2001, contingent upon continued employment of the holder. In connection with the issuance of these restricted shares, the Company recorded approximately $6,351,000 of deferred compensation, which is being recognized as stock compensation expense ratably over the vesting period. During the three months ended December 31, 2000, the Company recognized approximately $353,000 of stock compensation expense. The amount of stock compensation expense to be recorded in future periods could decrease if holders of unvested restricted stock cease to be employees of the Company prior to the lapse of the vesting period.
 
7.    INVENTORY WRITE-DOWN
 
          In the first quarter of fiscal 2001, the Company recorded an inventory write-down of $14,965,000 for excess and obsolete inventory related to the Company’s WebEngine Blazer product. This excess and obsolete inventory was due to an unforeseen decline in sales of the WebEngine Blazer product during the first quarter of fiscal 2001 and to the Company’s transition from sales of the WebEngine Blazer product to sales of its next-generation WebEngine Sierra product.
 
8.    SUBSEQUENT EVENTS
 
          In January 2001, the Company entered into a series of related agreements with Lawrence A. Genovesi, the Company’s Chief Executive Officer. These agreements were entered into in order to avoid significant sales of the Company’s stock by Mr. Genovesi as a result of a margin call on a personal loan that was collateralized by Mr. Genovesi’s holdings of the Company’s common stock. The Company agreed to guarantee a personal loan obtained by Mr. Genovesi from a financial institution (the “Bank”) through a deposit of $1,051,850 of the Company’s cash with the Bank (the “Guarantee”). The Guarantee period ends on January 9, 2002 and the balance of the amount deposited with the Bank will be returned to the Company. Mr. Genovesi and the Company also entered into an agreement whereby Mr. Genovesi has agreed to reimburse the Company for any obligations incurred by the Company under the Guarantee (the “Reimbursement Agreement”). Any unpaid balances under the Reimbursement Agreement bear interest at a rate of 10% per annum. In the event of a default of the Reimbursement Agreement by Mr. Genovesi, the Company has the right to apply any and all compensation due to Mr. Genovesi against all of Mr. Genovesi’s obligations outstanding under the Reimbursement Agreement. In addition, the Company and Mr. Genovesi entered into a revolving promissory note of up to $210,000 (the “Note”). The Note bears interest at a rate of 5.9% per annum and is due and payable in full upon the earlier of January 9, 2002 or 30 days following the date Mr. Genovesi ceases to be an employee of the Company.
 
          In conjunction with the Guarantee, the Reimbursement Agreement and the Note, the Company and Mr. Genovesi entered into a pledge agreement whereby Mr. Genovesi pledged to the Company all shares of the Company’s common stock owned by Mr. Genovesi as of the date of the agreement or subsequently acquired, and all options and other rights to acquire shares of the Company’s common stock owned by Mr. Genovesi as of the date of the agreement or subsequently acquired (collectively the “Pledged Securities”). Additionally, Mr. Genovesi pledged to the Company all additional securities or other consideration from time to time acquired by Mr. Genovesi in substitution for, or in respect of, the Pledged Securities. If Mr. Genovesi elects to sell any of the Pledged Securities during the term of the agreement, all proceeds of such sale will be applied first to any outstanding obligations related to the Note and then to any amounts payable under the Reimbursement Agreement. In addition to the Pledged Securities, the Note is collateralized by a second mortgage on certain real property owned by Mr. Genovesi. As of February 12, 2001, no amounts were outstanding under the Note or were required to be reimbursed to the Company under the Reimbursement Agreement.
 
SIGNATURE
 
          Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 NETWORK ENGINES, INC.

 

 

Date: July 24, 2001

 

 

/s/ DOUGLAS G. BRYANT
By: 
Douglas G. Bryant
Vice President of Administration, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)