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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2904044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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800 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(415) 366-4400
(Address of principal executive offices, including zip code, area code, and
telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH
REGISTERED)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
(TITLE OF CLASS)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on May 31, 1994 was $126,399,060.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 31, 1994 was 17,142,693.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1994 is incorporated by reference in Parts I, II and IV of this Form
10-K to the extent stated herein. The registrant's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on August 9, 1994 is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
Exhibit Index is located on page 20.
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PART I
ITEM 1. BUSINESS
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") is
headquartered in Redwood City, California, has more than 1,100 employees and
supports networks in over 50 countries. The Company was incorporated in
California in 1983 and reincorporated in Delaware in 1987. Its common stock is
traded on the New York Stock Exchange. N.E.T.'s primary mission is to be the
premier supplier of enterprise networks for information-intensive organizations
and multinational Value-Added Network ("VAN") service providers worldwide.
For over a decade, N.E.T. has manufactured and supported products for
wide-area ("WANs") networks. Many of the largest and most successful service
providers and end-user organizations in the world rely on N.E.T.TM products to
provide cost-effective and reliable digital communications services. Integrating
data, voice, video and image applications, N.E.T. products support a wide range
of technologies including ATM, SONET, frame relay, ISDN and internetworking.
Designed for reliability, flexibility and compliance with domestic and
international standards, N.E.T. products are backed by an extensive service and
support infrastructure.
INDUSTRY BACKGROUND
N.E.T.TM was formed in 1983 to take advantage of several fundamental
developments in the market for telecommunications products and services. These
changes began in the United States, and included significant opportunities
created by deregulation of the telecommunications industry, the breakup of AT&T
and availability of high-capacity leased, dedicated telecommunications lines,
referred to as digital transmission facilities or "circuits". Many countries
have since experienced similar changes in their telecommunications environment.
In the early-80s, AT&T and the Regional Bell Operating Companies ("RBOCs")
introduced "T1" circuits, operating at 1.544 megabits per second ("Mbps"). This
greatly expanded the digital circuit capacity available to private network users
in the US, and offered significant price/performance advantages over services
then available from AT&T and the RBOCs. The effect this had on how business was
conducted, and the opportunity it presented for companies like N.E.T. can be
illustrated by looking at the US experience. However, a similar situation exists
in other regions of the world.
Reliable transmission of voice and data traffic is of great importance to
major businesses and government agencies, particularly those that rely heavily
on moving information from place to place. For many of these organizations, such
as banks, brokerage houses, airlines, and parcel delivery services, loss of
applications or transmission capability due to failed communications networks
could result in a significant loss of revenue. By the mid-80s, some of these
organizations began to move their high volume, critical applications, such as
funds transfers, customer billings, automated teller and airline reservations,
away from public networks and application-specific networks and onto integrated
private networks built around fully dedicated circuits to achieve greater
reliability and cost savings. Such WANs, or backbone networks, quickly became
critical to the success of these enterprises.
These developments presented an opportunity for companies like N.E.T. to
design, manufacture and sell a new class of product to manage the increasing
amounts of bandwidth -- often referred to as a "bandwidth manager" or "T1
multiplexer". In the early years, N.E.T. described its bandwidth manager as a
Transmission Resource Manager ("TRM"), since its primary purpose was to manage
transmission resources, enabling an enterprise to consolidate multiple
independent voice and data networks onto a single integrated backbone, in order
to reduce transmission costs and provide a more reliable and more flexible
communications solution.
Certain of the Company's TRM products have broadened in scope in recent
years to manage communications resources. This evolution has involved the
expansion of interface types and the integration of packet-over-circuit
functionality into some of N.E.T.'s TRM products. Now the Company uses the term
Communications Resource Manager ("CRM") to more accurately describe such
products.
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The first member of the N.E.T. family of CRMs, known as the Integrated
Digital Network Exchange ("IDNX"), shipped in 1985. From the beginning, IDNX(R)
CRMs have performed three major functions: multiplexing, routing and network
management. Multiplexing is the process of aggregating streams of voice, data,
image and/or video from multiple sources for transmission over circuits. Routing
refers to the selection of the path that most efficiently utilizes the network
depending on the priority of the transmission, the condition of the network and
the volume of network traffic. Re-routing is the ability to dynamically route
existing network traffic around a failed circuit rapidly enough to keep the
end-to-end connection intact. Network management involves data collection,
analysis, decision making and presentation of information to allow the user to
view, control and manage the network's multiplexing, routing and other functions
to its fullest operational and economic potential.
Several manufacturers of T1 multiplexers, including N.E.T., grew rapidly in
the mid-to-late 1980's. As the industry has grown, the marketplace has been very
dynamic. There are several important changes which have taken and are continuing
to take place.
The increasing "internationalization" or "globalization" of businesses and
an increasing liberalization or deregulation of carrier services outside the US
have propelled the industry toward a worldwide focus, expanding opportunities
for companies like N.E.T., with products designed to meet worldwide standards.
In many countries, the national Post Telegraph and Telephone Organization ("PTT"
or "PTO") began providing digital circuits. Now, as the provision of
telecommunications products and services has been or is being deregulated, other
common carriers are offering digital circuits, on a national and international
basis.
During the 80s, circuits at 64 kbps and "E1" circuits, operating at 2.048
Mbps became available within many countries, with international circuits
typically operating at specific multiples of the 64 kbps rate. To meet the
growth in bandwidth requirements during the 90s, some PTTs or PTOs are providing
private network users with "E3" circuits, operating at 34.368 Mbps (with
bandwidth capacity equivalent to 16 E1s, but priced lower).
Meanwhile, in the US, bandwidth requirements continued to grow too. By the
early-90s, "T3" circuits, operating at 44.736 Mbps (with bandwidth capacity
equivalent to 28 T1s, but priced lower), were beginning to be used for private
networks.
It is expected by N.E.T. that this trend of leasing digital circuits of
increasing capacity will continue, as high capacity optical fiber utilizing
Synchronous Optical Network ("SONET") standards becomes the backbone of the
carrier networks in the US. SONET broadband transmission uses the optical
carrier ("OC") range including OC-1 (51.480 Mbps), OC-3 (155 Mbps), OC-12 (622
Mbps) and higher rates. In Europe, there is a different set of broadband
standards based on the Synchronous Digital Hierarchy ("SDH"). In anticipation of
this trend, N.E.T. developed its SONET Transmission ManagerTM ("STMTM")
Broadband Network Switch to extend bandwidth management capabilities into the
broadband arena. The STM is designed for US applications, handling T1 and T3
lines initially, but is capable of supporting higher OC rates as the market for
SONET networks expands.
At the same time, and at the other end of the capacity scale, the benefits
which have been realized by larger, central sites are being desired by smaller,
branch sites of information-intensive organizations. As a result, an increasing
demand for smaller access multiplexers has emerged. N.E.T. recently introduced a
version of the IDNX -- known as the IDNX/Micro 20 -- to address this growing
segment of the market.
The proliferation of local-area networks ("LANs") that interconnect
computers within an office building or campus environment has created a demand
for connectivity solutions that promote communications among LANs across WANs.
In the 90s the proportion of traffic on the WAN which originates from LANs has
been increasing steadily. The Company believes this trend will continue as more
and more powerful computing takes place at the desktop, and the increasing
globalization of enterprise activities results in users becoming less sensitive
to distance considerations and more used to sharing data between geographically
remote locations. N.E.T. has developed internetworking capabilities which
operate within the IDNX products to facilitate access to the WAN for LAN
traffic. As technology continues to evolve, the differences between LANs and
WANs are rapidly dissipating. The evolution of products incorporating technology
that facilitates
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this incipient merging of WANs and LANs is expected in the 1990s to
significantly affect how enterprises structure and implement their
communications networks and, therefore, to dramatically affect the markets in
which N.E.T. competes.
A cell relay-based technology -- Asynchronous Transfer Mode
("ATM") -- offers the ability to provide architectural consistency across the
boundaries of LANs and WANs. ATM technology is increasingly viewed as the
fundamental networking technology of the future. As a result, the evolution and
implementation of ATM technology and standards related to that technology are
expected to affect the success of future networking products offered by N.E.T.
and its competitors. N.E.T. plans to integrate ATM technology into its core
product offerings and into its next generation products, thereby providing a
seamless enterprise network. The Company has developed an ATM switch for the
embryonic ATM LAN backbone marketplace, and is working on ATM WAN systems for
next generation backbone networks. Using ATM, N.E.T.'s enterprise networks reach
beyond the wide-area to include campus networking.
Carriers are beginning to offer new high bandwidth switched
services -- often provided on an as-needed or "dial-up basis". These dial-up
services are creating a demand for network devices to intelligently use and
manage these switched services in conjunction with private enterprise
networks -- referred to as providing "bandwidth-on-demand". The availability of
such services has blurred the line between public and private networks, making
hybrid networking (a mix of public and private solutions) more common. In
response to this demand, N.E.T. has developed a module which provides
bandwidth-on-demand functionality within the IDNX CRM, using Integrated Services
Digital Network ("ISDN") technology.
In short, the explosion of communications technology and capacity, coupled
with creative utilization of that technology by competitors and users, has
dramatically increased the complexity of the markets in which N.E.T. competes.
The Company does not anticipate that this increasing complexity will abate
anytime in the foreseeable future.
In addition, there is an increasing demand on the part of customers for
"outsourcing" portions of their private networks. This means they are asking
carriers and others to provide both transmission services and the acquisition
and management of the equipment that interfaces to those transmission services.
As a result, carriers are playing a larger and larger role in the industry, as
they expand to provide enterprise network solutions which were previously
handled "internally" by enterprises. This expansion of carrier responsibility
into areas of the market where N.E.T. has traditionally been active has resulted
in N.E.T. working more closely with carriers as a variety of joint opportunities
emerge.
During the last decade, competition has steadily increased as the
networking marketing has grown and the importance of networking to end-user
client organizations has increased. While several companies have failed or been
merged, many new entrants have taken their place and, like N.E.T., existing
companies have expanded their offerings. As a result, N.E.T. feels that the
industry today is more competitive than ever (see "Competition" below).
COMPANY STRATEGY
Recently N.E.T. has chosen to focus on two strategic markets, where the
Company has experienced success to date, and believes there are continuing
opportunities in the future. The Company has targeted enterprise networks for
information-intensive organizations and multinational VAN service providers
worldwide. The Company's strategy is to focus its products, support and
distribution capabilities to address the needs of these specific market
segments. Products designed for these markets will be the primary focus for
research and development ("R&D") resources. The Company, however, does see
opportunities in a few distinct tactical markets, and a review of development
priorities revealed that N.E.T.'s initiatives in these markets may benefit from
R&D funds spent on the more strategic markets. Therefore, the Company plans to
manage the handful of currently identified tactical markets by leveraging
existing products and planned development.
The Company's sales strategy has been to reach the top 1,000 communications
users worldwide by employing a highly trained direct sales force in the US and
the UK, as well as leveraging sales through
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additional distribution channels worldwide. As part of the sales process, N.E.T.
or distributor personnel consult extensively with customers concerning their
network needs. Company personnel also provide support and training to customers
and distributors of the Company's products.
The Company believes that information-intensive organizations have a wide
range of communication requirements that determine their networking needs. For
example, these needs may range from handling very dense communications traffic
among relatively few locations, to handling less dense communications traffic at
many more locations further from the network's hubs, to managing the
interconnection of LANs to WANs. The Company believes that organizations beyond
the top 1,000 users represent an increasing percentage of the potential users of
its currently available and planned products, particularly those in the
broadband and access environments. As a result, the Company recognizes the need
to increasingly focus its products and its distribution capabilities on reaching
and meeting the needs of its current and potential customers. Failure to keep
pace with technological developments, marketing programs and distribution
capabilities of competitors would negatively affect the Company's performance.
The Company relies on distribution agreements with a number of partners,
outlined under "Marketing and Customers" below.
The Company's product and services strategy is to provide sophisticated
transmission, network management and connectivity applications and solutions.
N.E.T.'s core IDNX products provide transmission solutions aimed at T1, E1, T3
and E3 transmission elements of the network. Its access products (ADNXR/48TM,
SPXTM and IDNX/Micro 20 product lines) provide cost effective connectivity from
smaller locations with relatively lower capacity requirements. Members of the
STM family incorporate SONET switching matrices and are certified by AT&T for
compatibility with its Accunet T1.5, FT45 and T45 services. The STM product
family provides transmission management solutions targeted at T1, fractional T3
and T3 traffic running on metropolitan and wide-area transmission backbone
networks for major enterprises and cellular network providers. The Company's
network management products and services enhance operator visibility into
network conditions, permitting greater control and management of networks.
N.E.T.'s internetworking products enhance connectivity and interoperability
among devices that transmit information between LANs across WANs.
In 1992 N.E.T. introduced one of the industry's first commercially
available ATM products, the ATMXTM switch, to provide high capacity data
networking solutions for campus data backbones as well as for high performance
workgroups using workstations and servers. A key element in N.E.T.'s product
strategy is the use of ATM technology in the Company's next generation products.
ATM technology is a defined standard for cell switching, a form of fast packet
switching based on the use of short, fixed length packets called cells. The ATM
cell format was specified with the intent that ATM networks could simultaneously
accommodate the transmission of voice, video and data. Over the next ten years,
ATM technology is expected by the Company and industry analysts to become the
basis for the building of seamless enterprise networks. This technology will
support the bandwidth requirements of high performance desktop devices running
multimedia applications. It will also provide flexible allocation and
utilization of bandwidth for wide-area networks. Thus, ATM is the first
technology that offers a consistent network architecture for building worldwide
networks. N.E.T. has made significant investments in this technology in
anticipation of the development of LAN and WAN markets for ATM-based products.
The markets for ATM LAN backbones and ATM WANs in 1994 are both still embryonic
but growing. Major carriers are running pilot ATM projects across the wide-area,
and leading-edge enterprises and educational institutions are installing and
operating ATM test-beds, primarily for campus applications. The Company's sales
strategy is built in part around the need to provide a migration path which
allows existing clients to evolve their backbone networks to incorporate ATM
technology as appropriate in the future, while protecting their network
investment to date.
N.E.T. believes it must continue to focus its product lines to meet the
needs of its strategic markets. This may be done either through internal
development, the acquisition of technology or association with entities whose
technologies or product offerings complement its own. The Company has entered
into a number of agreements relating to the development, license or purchase of
technology to extend the reach and functionality of the Company's product lines
in areas such as SONET switching, T3 transmission, resource management
capability, LAN interoperability, SNA connectivity, network access products,
management applications and connectivity between private and public networks.
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A high level of continuing client support is integral to the Company's
strategy of providing long-term support and developing long-term relationships
with customers. See "Customer Service and Support" below. The Company's
strategic relationships involve links with equipment manufacturers and
resellers, global carriers and service providers in the enterprise and carrier
arenas worldwide. Objectives of these relationships vary, ranging from
technology licensing agreements, to joint product development plans and sales
and marketing programs. See "Marketing and Customers" below.
PRODUCTS
The Company has a single Engineering and Manufacturing organization
responsible for all the Company's products. These products are described below
in product line groupings.
IDNX Communications Resource Managers. The IDNX product family combines
multiplexing, routing and network management functions and is designed to allow
the largest users of voice and data communications to achieve the full potential
from wide-area networks in a highly cost-effective manner. IDNX CRMs, located at
the communication-intensive sites of N.E.T.'s customers, manage voice, data,
image and video transmissions over multi-vendor equipment used by the customer.
These CRMs operate regardless of the type of transmission line used or the
carrier from which the line is obtained. For example, a line could be fiber,
coaxial cable, microwave or satellite, and this line could be provided by an
Inter-Exchange Carrier ("IXC"), RBOC, or other common carrier.
The IDNX CRM, also referred to as a "node", interfaces with the customer's
equipment (for example, computers, private branch exchanges or "PBXs" and video
devices) and dedicated transmission lines or "trunks" connected to other
customer facilities or to various public communications services. IDNX-based
networks can be configured and automatically reconfigured in a wide variety of
complex network topologies (connection patterns) including point-to-point, ring,
star and fully interconnected mesh to accommodate the user's evolving
requirements. Multiple IDNX nodes can be installed at a single customer site to
provide additional capacity.
The IDNX product line currently consists of five functionally similar and
compatible CRM models that support a range of voice and data applications and
capacities:
- The IDNX/90 is N.E.T.'s largest and most powerful and expandable CRM. It
manages communications at T3/E3, T1/E1 and lower transmission speeds. The
IDNX/90 serves as the IDNX platform for high speed applications requiring
multi-megabit per second transmission rates.
- The IDNX/70 is an expandable CRM that manages communications at T1/E1 and
lower speeds, with a total capacity of up to 128 slots and 256 Mbps,
sufficient to support up to 96 trunks.
- The IDNX/20 is a smaller CRM that manages communications at T1/E1 and
lower speeds, with a total capacity of up to 24 slots and 32 Mbps,
sufficient to support up to 15 trunks.
- The IDNX/20S is an 8 slot CRM, available in a number of pre-defined
options with the possibility of adding additional modules in an extra
12-slot shelf. This is a low cost backbone extension device and can be
used for building even smaller wide-area networks, with a total capacity
of up to 20 slots and 32 Mbps.
- The IDNX/Micro 20 is the newest and smallest member of this family, which
has been designed as an Integrated Access Multiplexer. It can also be
used by smaller organizations for building low-cost networks that provide
the functionality and support for business applications found in the
larger, more expensive networks.
Each of these models can be configured to handle different numbers of
digital trunk lines between nodes and to provide different functions and
interfaces. Unlike most time division multiplexing bandwidth managers, N.E.T.'s
IDNX CRM models use efficient bandwidth allocation algorithms, assigning
bandwidth only as necessary to accommodate specific user requirements, rather
than wasting valuable bandwidth by allocating it in predetermined segments.
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IDNX Packet-Over-Circuit Products. N.E.T. offers products in the form of
hardware modules with appropriate software code, which can be installed in the
IDNX CRM platform and enable packet-traffic as well as circuit-traffic to be
managed in the most efficient way. This family of modules, known as the Packet
Exchange ("PX") family, provides support for internetworking activities and
switched services. There are three main product types, each of which has a range
of performance capabilities which vary according to PX hardware platforms and
software releases:
- The LAN/WAN ExchangeTM ("LWX") is an integrated packet-switching module
that resides within the IDNX CRM. When installed with the appropriate
software, the LWX module provides multiprotocol routing with concurrent
bridging support to interconnect geographically dispersed LANs over a
WAN. It enhances connectivity among devices that transmit information LAN
to WAN and LAN to LAN, and supports connections to local Ethernet or
Token Ring interfaces, as well as remote LWX modules, standalone routers,
packet-switching services or IBM controllers. It is designed to support
multiple LAN communication routing protocols and to allow bridging among
LANs based on the Ethernet/IEEE 802.3, as well as among LANs based on the
Token Ring/IEEE 802.5 standards. The LWX was the first packet switching
product to be integrated into the IDNX product line. It incorporates
software licensed to N.E.T. by Cisco Systems.
- The Frame Relay ExchangeTM ("FRXTM") is a frame relay switching node that
resides within the IDNX CRM. When installed with the appropriate
software, the FRX DCE interface provides frame relay access to bridges,
routers (including the LWX), front-end processors, or other devices that
support the frame relay DTE interface. In this way, the FRX allows the
integration of traffic from many different sources onto a consolidated
frame relay backbone, and provides an efficient, effective transport
mechanism for a variety of traffic types. The FRX DTE interface is
designed for connection to public frame relay networks, which in some
cases appears to provide an interim step for clients who are considering
moving their traffic onto public ATM services in the future.
- The Integrated Services Digital Network ExchangeTM ("ISDNXTM") is an ISDN
server module that resides within the IDNX CRM. It supports ISDN circuit
switching and routing capabilities and enables a variety of customer
premise equipment ("CPE") devices, such as PBXs, video codecs, routers
and front-end processors to connect to the IDNX CRM via an
industry-standard Primary Rate Interface ("PRI"). The signaling
capabilities of the ISDNX provide an intelligent connection between the
IDNX CRM and the CPE. This signaling connection enables an enterprise
IDNX network to function as an Enterprise ISDN, offering ISDN services to
the attached ISDN CPE. This means that bandwidth can be assigned as
needed to voice, data, image and video traffic. The ISDNX module thus
implements Dynamic Switched Bandwidth On Demand, within the domain of
existing IDNX networks. This changes the enterprise network environment
dramatically, introducing flexibility for network connections, and
allowing the use of ISDN functions independent of the ISDN services
available from public carriers.
FrameXpress. This family of scalable, standards-based products is designed
to provide frame relay solutions ranging from high-speed backbone switching to
remote standalone access. The FrameXpress platform uses the same data and
internetworking modules as N.E.T.'s family of IDNX Communications Resource
Managers, providing a growth path for future applications, as well as a
migration path to ATM as N.E.T.'s products evolve to use this technology.
FrameXpress products can help to increase network efficiency and simplify
network management by consolidating SNA and LAN traffic over a single frame
relay network. The FrameXpress can also reduce communications costs and simplify
traditional router networks by allowing multiple network devices to share a
common WAN interface. FrameXpress network management systems include accounting
features which facilitate usage-based billing for frame relay networks.
Members of the FrameXpress family are compatible with public and private
frame relay network standards, and the integral routing and bridging
capabilities allow use of these products both as integrated routers and frame
switches. The FrameXpress platform can also carry non-frame relay traffic, such
as voice and video, when optioned with additional interface modules.
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Currently there are three members of the FrameXpress family:
- The FrameXpress 4000 is N.E.T.'s largest and most powerful FrameXpress
node. It is designed for use in backbone sites or as a frame relay hub
site, handles trunking speeds up to T3/E3 rates, and supports up to 256
frame relay ports.
- The FrameXpress 2000 is designed for use in regional or hub sites that
require frame relay connectivity and supports up to 128 frame relay
ports.
- The FrameXpress 1000 extends the benefits of network traffic
consolidation and bandwidth efficiencies to smaller sites and supports up
to 24 frame relay ports.
The FrameXpress nodes include Simple Network Management Protocol ("SNMP")
agents and can be managed by a single management station that provides central,
local and remote management. There are two network management tools available:
- The FrameXpress Node Manager is a graphical management tool that enables
network managers to remotely review network events and make network
modifications. When used with the latest FrameXpress software, simple
point-and-click access is provided to forms-based network queries.
- The FrameXpress Accountant is a tool that gathers and stores information
about network usage. This data can be accessed to support activities
involving detailed traffic analysis, such as billing and capacity
planning.
IDNX Network Management Products and Services. N.E.T. offers a range of
network management products as well as service and support arrangements. The
Company's network management products enhance a customer's ability to control
and monitor its network and to diagnose and respond to changes or failures in
equipment and transmission resources in the network. Network management products
are designed to allow organizations to increase the productivity and
responsiveness of their network and of their telecommunications staff, thereby
increasing efficiency and reducing cost.
N.E.T. has three main network management products for IDNX backbones:
- The NetOpenTM 5000 network management system is a multi-user monitoring
and control system for the IDNX CRM and integral applications modules
such as the LWX, FRX and ISDNX. The user interface presents color graphic
representations of the network topology and network elements. The NetOpen
5000 System provides real-time monitoring, control and management of IDNX
networks and allows the monitoring of certain internetworking and access
products.
- The NetOpen/Circuit Manager gives a telecommunications department the
ability to partition the N.E.T.-managed physical backbone network into
multiple, independent virtual networks. Software partitioning allows
multiple groups to independently use such a single, enterprise-wide
physical network, providing greater economies of scale than many small
networks.
- The Expert Fault Management System ("EFMS") is a software application
which may operate co-resident and concurrent with the NetOpen 5000
network management system. EFMS uses expert systems technology to
automatically monitor IDNX network activity and to detect problems in
transmission lines, IDNX equipment and channel service units in the
network. EFMS automatically performs diagnostic procedures to determine
the source of detected problems, makes repair recommendations and creates
a record of the foregoing.
STM Broadband Network Switches. The STM broadband network switch is
designed to provide advanced networking functionality for broadband
communications. The STM node provides fast switching of wideband and broadband
circuits utilizing a low delay SONET switching matrix. With its broadband
switching capacity, intelligent networking, inverse multiplexing and compliance
with carrier services, the STM is designed to accommodate hybrid public/private
networking. The STM provides high service availability and simplifies network
management and operation through end-to-end connection management and dynamic
connection reroute and restoration. A network based on the STM switch provides
an effective, reliable and
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flexible wide-area communications infrastructure capable of supporting mainframe
channel extension, high speed router, CAD/CAM and other applications requiring
high capacity transport. An STM network can also integrate traffic from T1 based
devices, including videos, PBXs, routers and T1 multiplexers. Connectivity is
provided via several different interfaces. Information-intensive enterprises and
carriers are using STM networks for regional and wide-area backbone networks.
The basic building block of the SONET hierarchy, at a data rate of 51.480
Mbps, is the Synchronous Transport Signal level 1 ("STS-1"). Each STS-1 supports
traffic from a single T3, or from 28 T1s. There are five members of the STM
family, with switching capacity rated in number of STS-1s:
- The STM/E26 is the largest of N.E.T.'s STM family and was introduced in
the spring of 1994. The STM/E26 has a switching capacity of up to 26
STS-1s, to support the broadband communications requirements of the
largest sites.
- The STM/E18 (formerly known as the "STM/18") was the first member of this
family, introduced in the fall of 1991. It has a switching capacity of up
to 18 STS-1s, and is designed to meet the broadband communications
requirements of larger sites.
- The STM/E12 was introduced in the spring of 1994 and has a switching
capacity of up to 12 STS-1s.
- The STM/S8 (formerly known as the "STM/S") was introduced early in 1993
as a solution for smaller sites. It has the same features as the larger
STM and has a switching capacity of 8 STS-1s.
- The STM/S12 was introduced in the spring of 1994 as an alternative
solution for smaller sites, with a switching capacity of 12 STS-1s.
An STM network can be managed using the following network management
systems:
- The Node Operations Console ("NOC") allows configuration, control and
monitoring of all STM network nodes. The NOC system provides monitoring,
reporting and control capabilities using a simple windowing user
interface with pull-down menus and preset forms. NOC software runs on low
end SUN/SPARC workstations.
- The Broadband Operations System ("BOS") provides a color graphical
representation of STM nodes and the STM network. The views provide a
dynamic, graphical representation of object states, view icons and LED
symbols that change color to reflect alarm conditions. The graphical
views simplify frequently used network operations tasks: for example,
many of the reports which are accessible using commands on NOC, are
quickly available using pop-up menus on BOS.
SPX Statistical Multiplexers. The Company's SPX multiplexers provide low
capacity networking for independent low to medium volume data networks with an
upgrade path to higher capacity and functionality.
- The Series 2000 and SPX lines of statistical multiplexers interconnect
multiple sites that require asynchronous data communication. The SPX
intelligent multiplexers include the 400 series of products, which
provide TCP/IP and DEC LAT local-area network connectivity to an SPX
network. N.E.T. also manufactures and markets modems and various other
data switches and data communications equipment accessories. The SPX
access multiplexer with FramelinkTM frame relay software provides DTE
access to either a public or private frame relay wide-area network. This
means that the SPX can link both Asynchronous and Synchronous
terminal/host traffic as well as bridge Ethernet LANs over a Frame Relay
WAN, thus providing cost-effective access from remote sites.
- The SPX/SITM Software Interface allows direct connection through Ethernet
between a Digital Equipment Corporation host computer and a widearea
network based on the SPX product line.
ADNX/48. The ADNX/48 Integrated Access Multiplexer is based on Intelligent
Channel Bank ("ICB") technology. It provides up to 24 voice and data interfaces,
multiplexes those circuits into one or two T1 or fractional-T1 trunks and
supports hybrid networking in the United States. Recently a bridge/router
module -- the LAN/WAN Router ("LWR") -- was introduced. This allows customers to
use the
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ADNX/48 Integrated Access Multiplexer to combine LAN traffic with voice,
synchronous data and video over a single T1 or fractional-T1 cost-effectively.
- The NetOpen/AMS-II management product monitors and controls the ADNX/48
product. The AMS-II is able to operate on its own workstation for small
ADNX/48-only networks, or co-resident with the NetOpen 5000 for networks
containing both IDNX and ADNX/48 equipment.
ATM Products. The Company has made a substantial investment in ATM
technology and products. The first ATM product, the ATMX switch, is a high
performance ATM LAN switch and was introduced in 1992. The ATMX provides 1.2
Gbps backplane switching capacity and can support up to ninety 100 Mbps full
duplex fiber optic ports. The ATMX has primarily been used in trials rather than
in applications with large revenue potential. While the Company continues to
invest significant resources in ATM product development related to the next
generation of products incorporating ATM technology, current ATMX inventory was
written-off in fiscal year 1994.
The current ATM software operating on the ATM switch contains several
features: LAN emulators, Virtual LAN capability and congestion control. LAN
emulation allows existing LAN applications and protocols to operate
transparently over an ATM network. Virtual LAN capability ("VLAN") allows users
to build LANs that require no physical segmentation -- LANs can be logically
segmented by user group rather than physically by geography. Hardware moves,
adds, and changes in the network are automated, significantly reducing the cost
of network management. Congestion control is an important element in high
end-to-end performance for client server applications. N.E.T.'s ATM software
features a congestion management system to control the transmission from
end-stations. The Broadband Operating System ("BOS") provides a graphical, SNMP
based network management system for the ATMX switch. Current ATM development
efforts, a portion of which are being funded under an agreement with Ericsson
Business Networks AB of Sweden, are directed toward products that will address
the needs of enterprise network and VAN customers and prospects.
The commercial availability of all of the Company's products and services
in a timely manner and their acceptance by customers are important to the future
success of the Company. There can be no assurance that customer acceptance of
products and services will be achieved or maintained. Substantial delays in such
availability or acceptance would materially and adversely affect the Company's
operating results and financial condition.
MARKETING AND CUSTOMERS
Marketing and Distribution Strategy. As noted above, N.E.T.'s marketing
strategy has been to focus on organizations with extensive voice, data, image
and video communications needs. These organizations include banks and other
financial institutions, airlines, retail chains, manufacturers and government
agencies. N.E.T. markets products by means of its own direct sales organization
and distributors domestically and in the United Kingdom, and through
distributors overseas, often with support from N.E.T. personnel. Although these
channels and their distribution capabilities are extensive, their levels of
sales activity and knowledge of N.E.T. products vary widely over time and on a
geographic basis. In addition, the Company faces distribution challenges for its
next generation products which could impact the Company's ability to leverage
its products as they are introduced, and could negatively affect the Company's
performance. N.E.T. has subsidiaries which focus on sales to the US government
(N.E.T. Federal, Inc.), and the European market (N.E.T. Europe Limited and
N.E.T. Europe SA). Increasingly, the Company has been supplying its products to
carriers and systems integrators as prospective customers turn to them to
provide network services and management.
Sales to the US Government. N.E.T.'s wholly owned subsidiary, N.E.T.
Federal, Inc., markets the Company's products to United States governmental
entities both directly and through collaborative government contracting and
subcontracting arrangements. It has entered into several contracts under which
it provides its products and services to various government agencies (the
"Government Contracts"). The Government Contracts are for varying periods, but
most may be terminated by such government agencies at their convenience or at
annual intervals. In fiscal 1994, 1993, and 1992, sales to the US Government
accounted for 28%, 24%, and 15%, respectively, of N.E.T.'s revenue. These
amounts include sales, which
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amounted to 20%, 17% and 7% of revenue for fiscal years 1994, 1993 and 1992,
respectively, under a contract with the Department of Defense under which
various government agencies (to date, primarily the Air Force) can order
products, installation and service from N.E.T.
Relationship with IBM. N.E.T. entered into an agreement with International
Business Machines Corporation ("IBM") in June 1987 (the "IBM Agreement").
Pursuant to the IBM Agreement, as amended, IBM has non-exclusive, worldwide
marketing, installation and service rights for current and future releases of
N.E.T.'s IDNX and ADNX products and certain related products. IBM also resells
STM products in the US. IBM has been marketing N.E.T.'s products under the
N.E.T. label, but pursuant to the IBM Agreement it has the right to market such
products under the IBM label at any time. In addition, pursuant to the IBM
Agreement, IBM has provided funding and has licensed technology for N.E.T.'s use
in future product development. Under the IBM Agreement and other agreements, IBM
licensed to N.E.T. several of its technologies, including Advanced-Peer-to-Peer
Networking ("APPN"), Data Link Switching, Split-Bridge Routing and Token Ring
Network Bridge Program technology and IBM LAN Network Manager Agents. IBM and
N.E.T. also have engaged in coordinated development to enhance the integration
of IDNX products into the IBM NetViewTM environment. IBM is not obligated to
purchase any products under the IBM Agreement. The IBM Agreement had an initial
term of five years. It has been extended until June 11, 1996 and may be renewed
for three additional consecutive one year terms. IBM may terminate the IBM
Agreement upon six months notice and payment of certain sums to N.E.T. IBM may
at any time cancel orders it has placed pursuant to the IBM Agreement subject to
payment of certain sums to N.E.T. and may sell competing products. IBM is also
an end-user customer for N.E.T.'s products under the IBM Agreement. In fiscal
1994, 1993, and 1992 IBM accounted for 11%, 15%, and 20%, respectively, of
N.E.T.'s revenue.
No other single customer account was responsible for ten percent or more of
revenue during fiscal 1992, 1993, or 1994.
International Sales. N.E.T. has established subsidiaries in the United
Kingdom (N.E.T. Europe Limited) and France (N.E.T. Europe SA), with sales
offices in other European countries, through which it markets and supports its
products to the regions of Europe, the Middle East and Africa. The Company also
markets and supports its products from offices in the US to the regions of Asia
Pacific and Latin America. International sales represented 22%, 25% and 22% of
the Company's revenue in fiscal 1994, 1993 and 1992, respectively. Government
ownership or control of the telecommunications industries and regulatory
standards in some foreign countries could be a substantial barrier to the
introduction of CRM products for use in private or hybrid networks in such
countries. Financial information about foreign operations and export sales is
discussed in the Segment Information footnote in the Notes to Consolidated
Financial Statements in the Company's 1994 Annual Report filed as Exhibit 13.1
to this report on page 25.
Relationship with Ericsson. In December 1989, the Company entered into a
systems integration and distribution agreement with Ericsson Business Networks
AB of Sweden ("Ericsson"). Under this agreement, as amended, Ericsson has the
non-exclusive right to purchase, resell, distribute and license the Company's
IDNX products and network management software worldwide. Ericsson is responsible
for providing all service and support for the N.E.T. Products marketed by it.
Under the agreement, the Company and Ericsson also have a development committee
to coordinate product development. The Company also appointed certain Ericsson
affiliates as non-exclusive distributors of the Company's products. In addition,
in July 1993, Ericsson and N.E.T. signed a cooperative agreement for the
development and sale of next generation ATM products for enterprise networks.
Under this agreement, as modified, Ericsson and N.E.T. will jointly fund the
development of enterprise switching equipment, allowing both companies to offer
broad solutions to enterprise networking, as well as to use N.E.T.'s ATM
technology in the development of future products.
The Company also has entered into distribution and technology agreements
with many other companies, including Mitsui & Co. Ltd. in Japan and Datacraft
Asia.
The Company's relationships with carriers further expand the availability
of N.E.T. products, and include joint marketing agreements with both AT&T and
MCI, and a systems integration agreement with Bell Atlantic Network Integration.
The Company's products are offered by other carriers around the world, such as
US West and Southwestern Bell in the US, and France Telecom, Telia and
TeleDanmark in Europe.
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In recent years the Company has experienced decreases in first quarter
revenues versus the preceding fourth quarter and this trend is expected to
continue. Historically, the majority of the Company's revenues in each quarter
results from orders received and shipped in that quarter, and a significant
proportion of such revenues result from orders received and shipped in the last
month of the quarter. Because of these ordering patterns and potential delivery
schedule changes, the Company does not believe that backlog is indicative of
future revenue levels. For further information, please refer to "Business
Environment and Risk Factors" in "Management's Discussion and Analysis" on page
17 the Company's 1994 Annual Report.
CUSTOMER SERVICE AND SUPPORT
A high level of continuing customer service is integral to the Company's
strategy of providing long-term support and developing long-term relationships
with customers. N.E.T. trains customer personnel to operate its products and, in
some cases, to perform routine maintenance and repair of these systems. Service
at customers' facilities may be handled either by N.E.T. personnel operating out
of N.E.T.'s service locations or by IBM, Ericsson, other distributors or
third-party service organizations who are trained by and under contract with
N.E.T. Customers may choose from among various maintenance plans and agreements.
Customers can have access to one of N.E.T.'s three Technical Assistance Centers,
two of which are located in the United States and one is located in the United
Kingdom. Technical assistance is fee-based, staffed year round and available 24
hours a day. N.E.T. products are generally sold with limited warranties on
equipment and software ranging in length from 90 days to one year, which when
sold by N.E.T. to end users generally commence upon completion of installation
or acceptance. Certain products have different warranty periods and conditions.
A significant amount of the Company's revenues and profits are generated by its
service and support offerings. There can be no assurance that customer
acceptance of such current and future offerings will be maintained or achieved.
If it is not, the Company's operating results could be materially and adversely
affected.
COMPETITION
Around the world, the communications industry has experienced unprecedented
growth and increasing complexity during the past decade. The segments of the
communications industry in which the Company competes have also grown and become
more complex. These segments are intensely competitive and characterized by
advances in technology that frequently result in the introduction of new
products and services with improved performance characteristics. Many of the
Company's competitors and potential competitors, foreign and domestic, have more
extensive engineering, manufacturing and marketing capabilities and greater
financial, technological and personnel resources than those of N.E.T. The
Company believes that the principal competitive factors in its markets are
product features, distribution capabilities, quality and reliability, reputation
and long-term prospects, service and support, and price. The Company believes
that it currently competes favorably with respect to many of these factors.
Failure to keep pace with technological advances or other competitive factors
would adversely affect the Company's competitive position and could adversely
affect N.E.T.'s future revenue levels and operating results.
In an industry of increasing complexity, with niche markets proliferating
year after year, the Company has focused its competitive strategy to leverage
its core competencies. Its focus is predominantly on two strategic markets:
enterprise backbone networks (including campus and wide-area network
applications) and multinational Value-Added Networks. N.E.T. has further
redirected its ATM product strategy to align with its traditional enterprise
networking strengths. In addition, the Company has products that address a
number of tactical markets, such as the STM for cellular networks in the US, the
SPX for low-end networking worldwide, and the ADNX/48 for the US channel bank
marketplace -- each a source of revenue or potential leverage.
N.E.T. encounters significant competition in strategic and tactical markets
in the provision of complex enterprise network products and services from both
direct and indirect competitors.
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Direct Competition. Direct competitors are other communications equipment
vendors, both large and small. Some of these sell directly competitive products;
others sell products which provide similar functionality but in a different
manner.
For example, high-end TDMs which compete directly with N.E.T.'s IDNX CRMs
are available from WAN communications equipment vendors such as Ascom Timeplex,
General DataComm and Newbridge Networks. Similar functionality is also provided
by companies who have chosen a different product architecture. For instance,
bandwidth management products based on packet or frame switching platforms are
provided by WAN communications equipment vendors such as Cascade Communications,
StrataCom and Netrix. These companies offer, or have stated that they intend to
offer, products with some capabilities similar to those of some N.E.T. products
and offer a range of multiplexing and network management products marketed to
the organizations targeted by N.E.T.
A relatively larger number of companies have products addressing low-end
networking and network access market requirements served by certain of N.E.T.'s
low-end IDNX, ADNX and SPX products. For example, the T1 network access market
focuses on branch-office connectivity, and competition arises from a number of
different types of vendors. Many potential users of high-end equipment are
expanding, or intend to expand, installed networks beyond the
central-sites -- now internetworking vendors, intelligent hub manufacturers and
WAN communications equipment suppliers sometimes join the traditional suppliers
of access devices to compete for sales of integrated access products.
Data traffic has become an increasingly larger component of corporate
networking, and in turn as more and more data traffic originates on LANs,
internetworking solutions have become an alternative to the Company's CRM
solutions. Router vendors, such as Cisco Systems and Wellfleet Communications
sometimes compete for the same business as the Company's IDNX, ADNX and
internetworking products. The Company encounters significant competition with
respect to price and features from these companies, in accounts where the
proportion of LAN-originating data traffic is high compared to other traffic
types (e.g. voice, synchronous data) on the enterprise network.
In addition, the Company's broadband (STM and high-end IDNX) products face
competition from makers of equipment designed for high-capacity private
networks, such as Ascom Timeplex, Newbridge Networks, T3plus Networking and
Tellabs. Some carriers also offer applications solutions in the form of
broadband equipment provided by other competitors or manufactured by the
carriers.
As the market for products implementing ATM technology evolves it is
expected that the Company's ATM product line will face significant competition.
In the WAN segment of the ATM marketplace, the Company expects to continue its
historic competition with WAN communications equipment vendors such as Ascom
Timeplex, General DataComm and Newbridge Networks as well as Cascade
Communications, StrataCom and Netrix. Although there are numerous companies
offering ATM LAN products, the Company does not expect to compete directly with
the majority of these. For example, N.E.T. does not expect to compete directly
with intelligent hub vendors such as 3Com, Cabletron Systems, IBM/Chipcom,
SynOptics, and Ungermann-Bass, nor with the router vendors such as Cisco Systems
and Wellfleet in their traditional/ historic markets. However, N.E.T. does
expect to compete with these companies, in addition to other vendors of ATM LAN
switches such as Fore Systems and Hughes LAN Systems, to the extent their
offerings address the same markets as the Company's products and services.
Indirect Competition. Indirect competitors include the carriers, systems
integrators and outsourcers who offer alternative solutions to enterprise
backbone networks owned and managed by corporations and agencies. In some cases,
the competing solution may take the form of a combination of service, rather
than product, offerings; in others the emphasis may be on the provision of
day-to-day management of an enterprise network on behalf of the end-user
organization. N.E.T. sometimes competes with carriers such as AT&T, MCI, British
Telecom and other telephone companies, many of whom are also partners with, and
in some cases customers of, N.E.T. -- see above under "Marketing and Customers"
for details.
A growing number of carriers are joining forces to provide Value-Added
Network services, which compete with enterprise-owned backbone networks.
However, a number of the VAN service providers such as
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AT&T Business Communications Services, Eunetcom, Infonet Services and Sprint
International are N.E.T. customers. The Company believes that it is in a
favorable position to provide equipment to VANs. Therefore, one element of the
Company's strategy focuses on supplying equipment and services to multinational
VAN service providers. Some systems integrators such as EDS and Perot Systems
and outsourcers such as Advantis (a subsidiary of IBM and Sears) and BT
Syncordia (a subsidiary of British Telecom) also use N.E.T. equipment to
facilitate their business offerings, as well as sometimes competing indirectly
with the Company by providing alternative solutions for enterprise networking
issues.
Private and hybrid WANs, utilizing CRMs, and leased T1, T3 or other
capacity lines, can serve as a substitute for certain carrier network offerings,
including Software Defined Networks ("SDN"), and virtual private network
offerings of AT&T, the RBOCs and other carriers. N.E.T. therefore competes with
AT&T in certain of its offerings, and with similar offerings of other carriers.
Most of these carriers have substantially greater marketing resources and
customer recognition than the Company. Changes in regulatory policies and taxes
may affect the relative cost-effectiveness of using private networks as compared
to common carrier offerings which could significantly affect or enhance the
ability of the common carriers to compete with N.E.T.
The importance of frame relay for data transport across the enterprise
network, and the number of subscribers to frame relay services, are increasing.
N.E.T. provides frame relay solutions which allow users to build private or
hybrid frame relay networks, which are compatible with carrier offerings, and
enable users to take advantage of carrier services to consolidate LAN and legacy
data into, and along with, frame relay traffic. The Company's solutions
sometimes compete directly with carrier public frame relay services -- for
example, where the customer premise traffic is provided in frame relay format,
and has no conversion or consolidation requirement for legacy or LAN data, the
frame relay traffic can use carrier public frame relay services directly. Some
of the carriers offering frame relay services do so from N.E.T. frame relay
product platforms, but this is not the case in general.
N.E.T. expects to be in a similar position with respect to the use of ATM
for enterprise networks: enabling the construction of private or hybrid networks
which comply with, and enable users to leverage the benefits of, carriers'
public ATM services, while sometimes competing with carriers' public ATM
services.
As discussed below under "Government Regulation", the RBOCs are currently
prohibited by the AT&T divestiture decree from manufacturing telecommunications
equipment or customer premises equipment.
IBM is not prohibited by the IBM Agreement from manufacturing, marketing or
servicing products that compete directly with N.E.T.'s IDNX or other products.
If IBM announced the availability of such products, N.E.T.'s operating results
could be adversely affected. IBM also offers maintenance agreements for products
it distributes, which compete with those of the Company.
In summary, competition for sales of the Company's products involves a
number of factors in addition to price, such as quality, reliability,
flexibility for growth, reputation and long-term prospects, and service and
support. Competition from AT&T, the RBOCs, or other common carriers or service
providers or from other competitors as discussed above, could cause a severe
reduction in selling prices or volumes for CRMs and other communications
products or services, which would have a material adverse effect on the
Company's operating results and financial condition.
MANUFACTURING
N.E.T. manufactures IDNX, ADNX, SPX, STM, ATMX and certain other products
from components and assemblies designed to meet the Company's quality and
reliability requirements. Other products are manufactured by outside vendors. To
date, N.E.T. has not experienced any significant delays in the delivery of
material or products from either subcontractors or vendors. Some components,
assemblies, subassemblies and products are currently available only from a
single source. Although N.E.T. believes alternative sources or substitutes for
most of such components and products are available or could be developed if
necessary, any delay or difficulties in developing such alternatives or
substitutes could result in shipment delays and adversely affect operating
results. The N.E.T. manufacturing process consists of the production of
mechanical and
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electrical sub-assemblies as well as custom system assembly. N.E.T. uses custom
fabricated printed circuit boards and subassemblies, standard and custom
integrated circuits, custom power supplies and mechanical hardware purchased
from outside suppliers. Although certain relatively simple fabrication and
assembly processes are performed by subcontractors in the United States and East
Asia, testing at various stages of the manufacturing processes, and the final
assembly and testing are primarily performed at the Company's Redwood City,
California facilities.
The Company has initiated a Total Quality Management process and is
focusing efforts on enhancing the quality of products and services delivered to
customers worldwide. This includes activities to improve the quality of supplied
components and subassemblies and internal company processes. The Company has
adopted the ISO 9000 International Quality System and is now certified to the
ISO 9002 standard, and is working toward a goal of conforming to the ISO 9001
standard.
The Company has entered into software escrow arrangements and has granted
to certain customers manufacturing rights which are exercisable by the customer
in limited circumstances, such as upon material default by the Company of its
obligations under its agreement with such customers.
The Company seeks to maintain inventory in quantities sufficient to ship
product quickly (normally within 15 to 60 days) after receipt of order. Many of
N.E.T.'s customer agreements provide that delivery dates may be rescheduled or
orders cancelled, although in certain circumstances a charge may be assessed
upon rescheduling or cancellation. Because of this and other factors, including
the Company's generally short delivery cycle, as noted above, N.E.T. does not
believe that backlog at any specific time is indicative of actual revenues that
will be recognized in any succeeding period.
RESEARCH AND DEVELOPMENT
N.E.T. engages in research and development ("R&D") to develop new products
and enhancements to existing products as technology permits and markets evolve.
N.E.T.'s development efforts are focused on N.E.T.'s two strategic market
segments -- enterprise backbones and multinational VANs worldwide. Other
tactical markets will also benefit from the R&D done for strategic segments,
because there is overlap in product requirements from market to market. Product
priorities include those intended to enable N.E.T. to occupy a leadership
position in ATM WAN solutions; to enhance the carrier-compatibility of certain
products; and to introduce product enhancements which meet the evolving
requirements of specific markets and distribution channels.
On a percentage of revenue basis, N.E.T. expects to invest in R&D more
heavily than the industry as a whole. Management believes that product and
technology leadership are keys to long-term success in an industry and market
that is evolving as rapidly as networking is today. N.E.T. believes that its
future operating results will depend on its ability to continue to enhance its
existing products and to develop and timely bring to market new products that
satisfactorily meet market needs. There can be no assurance that N.E.T.'s
product development efforts will result in commercially successful products,
that N.E.T.'s products will not be rendered obsolete by changing technology, or
that recently announced or available products will be successful.
Research and development expense increased by $1.5 million (5%) in fiscal
year 1994 to a total of $33.7 million, from $32.2 million in fiscal year 1993
and $28.5 million in fiscal year 1992. In addition, $2.7 million, $3.4 million
and $3.0 million in fiscal 1994, 1993 and 1992, respectively, of software
development costs were capitalized in accordance with FAS 86 and have since been
partially amortized or written-down to net realizable value. For further
information, please refer to the Notes to Consolidated Financial Statements in
the Company's 1994 Annual Report. R&D expense as a percentage of revenue
decreased from 14.7% of revenue in fiscal year 1993 to 14.2% of revenue in
fiscal year 1994. Management plans to continue funding research and development
efforts at levels necessary to advance product programs. At the same time, it is
management's intention to increase the focus of these development efforts and
therefore keep research and development spending dollars at levels comparable
with fiscal 1994.
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GOVERNMENT REGULATION
Government regulatory policies are likely to continue to have a major
impact on N.E.T.'s business by affecting the availability of voice and data
communications services and equipment, the prices and terms of the competitive
offerings of AT&T and the other common carriers, and the ability of the RBOCs
directly to manufacture and market equipment and services that compete with
N.E.T.'s offerings (see "Competition" above).
The RBOCs are currently prohibited by the AT&T divestiture decree from
manufacturing telecommunications equipment or customer premises equipment. From
time to time, proposals have been made to the US Department of Justice, in
Congress and the courts to remove the decree restrictions. Legislative proposals
are currently being considered in Congress which would remove or substantially
modify the manufacturing restrictions. A bill that would allow the RBOCs to
engage in the design, development and fabrication of all types of
telecommunications equipment, including customer premises equipment, has in the
past, been passed by the United States Senate. N.E.T. is unable to predict the
outcome or the timing of any action on this subject. If any such proposal is
adopted, N.E.T. could be materially and adversely affected by being forced to
compete directly with the RBOC's.
In addition, N.E.T. customers usually purchase or lease transmission
facilities (such as T1/E1 and T3/E3 lines) from common carriers such as AT&T,
MCI, RBOCs, PTTs, PTOs or their affiliates. These carriers are subject to
varying degrees of public utility-type government regulation of the rates and
terms of their services. In the US, decisions at the federal and state level
have in some instances provided AT&T, the RBOCs, and other carriers with
increased flexibility in structuring and pricing their services. Changes in the
rates or terms of carrier-provided service and equipment offerings may affect
the demand for private network products and services, including those provided
by N.E.T. Similarly, regulatory policies of foreign governments may affect the
demand for and ability of N.E.T. to market its products outside the United
States. As an example, within the European Union ("EU") there is a telecom
authority which is requiring member country PTTs in Europe to adopt or offer
certain transmission services and behaviors. These changes might significantly
affect the demand for or useability of private or hybrid network solutions which
N.E.T. provides.
The FCC and foreign governments require that N.E.T.'s products comply with
certain rules and regulations, including technical rules designed to prevent
harm to the telephone network and avoid interference with radio-based
communications. The Company believes it complies with or is exempt from all
applicable rules and regulations with respect to the sale of its existing
products in the United States and in certain foreign countries. Failure to
comply with FCC or similar governmental requirements may result in installed
equipment being disconnected from common carrier-provided circuits. Any delays
in complying with FCC or foreign requirements with respect to future products
could delay their introduction or affect the Company's ability to produce and
market its products. Sales to the US Government are subject to compliance with
applicable regulations (e.g., Federal Acquisition Regulations).
PATENTS AND LICENSES
N.E.T. has obtained patents on inventions relating to its products and has
applied for others. Issued patents in the US expire on dates ranging from
December 7, 2004 to September 13, 2010 and in foreign countries, they expire
from December 1, 2004 to December 4, 2010. While possession of patents and
copyrights could impede other companies from introducing products competitive
with the Company's products, N.E.T. believes that its success does not depend
primarily on the ownership of intellectual property rights, but primarily on its
innovative skills, technical competence and marketing abilities and,
accordingly, that patents, copyrights and trade secrets will not constitute an
assurance of N.E.T.'s future success.
Pursuant to the IBM Agreement, IBM received a royalty-free license to
certain present and future N.E.T. patents. In addition, the Company has entered
into a patent cross-license agreement with AT&T covering certain of AT&T's and
the Company's patents. Pursuant to the agreement, the Company made a $3 million
initial payment to AT&T in fiscal 1992, which amount has been capitalized and is
being amortized over the life of the agreement, and has made additional payments
that were not material. Certain additional
16
<PAGE> 17
amounts, which are not expected to be material, may be payable through March
1995, at which time the agreement expires.
Because of the existence of a large number of third-party patents in the
telecommunications field and the rapid rate of issuance of new patents, some of
the Company's products, or the use thereof, could infringe third-party patents.
Allegations of such infringement have been made in the past, and additional
allegations may be made in the future. If any such infringement exists, the
Company believes that, based upon historical industry practice, it or its
customers should be able to obtain any necessary licenses or rights under such
patents on terms which would not be materially adverse to the Company. However,
there can be no assurance in this regard.
The Company regards elements of its software and engineering as proprietary
and relies upon non-disclosure obligations, copyright laws and software
licensing agreements for protection. Despite these restrictions, it is possible
that competitors may obtain information that N.E.T. regards as proprietary. Some
of the technology incorporated in certain of the Company's products is licensed
from third parties. In the event of termination or expiration of the licensing
agreements for such technology, the Company's ability to market those products
and our results could be adversely affected.
EMPLOYEES
As of March 31, 1994, the Company had 1,164 employees. Of the Company's
total employees, 153 were in Finance and Administration, 240 were in Engineering
and Research and Development, 204 were in Field Service and Training, 130 were
in Marketing, 263 were in Sales and 174 were in Manufacturing and Quality
Assurance. None of the Company's domestic employees are represented by a
collective bargaining agreement. The Company's French employees are governed by
a national collective bargaining agreement applicable to all employers and
employees in its industry. The Company has never experienced any work stoppage.
The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
N.E.T. leases approximately 315,000 square feet of office, research and
development and manufacturing space in a modern industrial park in Redwood City,
California. The majority of N.E.T.'s space, 287,000 square feet, is leased until
October 1998. The balance, approximately 28,000 square feet, is under a lease
that expires in March 1995. N.E.T. also leases sales and service offices at
numerous locations throughout the United States, France, and the United Kingdom.
The Company believes that its facilities are, in all material respects,
suitable, and adequate for its presently anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings pending or
threatened against it at this time. In the second quarter of fiscal 1992, the
Company recorded a charge of $13.4 million for the settlement of all pending
consolidated class action securities litigation lawsuits. As part of the
principal terms of the agreement, the Company issued to members of the plaintiff
class warrants to purchase the Company's Common Stock. The warrants expired
March 30, 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
17
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages at June 1, 1994, are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - - ------------------------------------------ --- -------------------------------------------------
<S> <C> <C>
John K. Clary............................. 48 Senior Vice President, Product Operations
Joseph J. Francesconi..................... 51 President, Chief Executive Officer, and Director
Craig M. Gentner.......................... 47 Senior Vice President, Chief Financial Officer
and Corporate Secretary
Walter J. Gill............................ 59 Vice President, Chief Technology Officer and
Director
Raymond E. Peverell....................... 46 Senior Vice President, Sales and Marketing
</TABLE>
John K. Clary joined the Company in January 1986 as Director, Marketing
Operations. In April 1994 Mr. Clary was appointed Senior Vice President, Product
Operations. From October 1988 to May 1989 he served as Senior Director of the
IBM Program, and from July 1989 until April 1994 Mr. Clary served as Vice
President and General Manager of Network Equipment Technologies, Access Products
and other divisions.
Joseph J. Francesconi was named as a director and was appointed President
and Chief Executive Officer of the Company in March 1994. From 1977 until he
joined the Company, Mr. Francesconi served in a number of management capacities
at Amdahl Corporation, a leading mainframe manufacturer, most recently as
Executive Vice President. Prior to joining Amdahl Corporation, Mr. Francesconi
spent 12 years with IBM Corporation.
Craig M. Gentner joined the Company in July 1989 as Vice President,
Finance. In July 1990 Mr. Gentner was appointed Vice President, Chief Financial
Officer, and Corporate Secretary, and in May of 1992 he was appointed Senior
Vice President. From 1985 to 1989 Mr. Gentner was employed by Xidex, a
manufacturer of computer peripheral products, most recently as Senior Vice
President and Chief Financial Officer.
Walter J. Gill, a founder of the Company, has served as a director of the
Company since January 1991 and from May to August 1983. Since 1988 he has served
as Vice President and Chief Technology Officer. Prior to that time, he served in
several senior management positions, including Vice President and General
Manager, Private Network Division and as the Company's Chief Technical Officer
from April 1987 to February 1988, and as Vice President, Engineering from July
1983 until April 1987.
Raymond E. Peverell was appointed Senior Vice President, Sales and
Marketing in January of 1993. From 1983 to 1992, Mr. Peverell was employed by
Tandem Computers, Inc. holding various positions, his last being Vice President,
Strategic Partnership Development. Prior to 1983, Mr. Peverell held several
positions over a 12 year span, with Burroughs Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is set forth in the section
captioned "Common Stock Dividends and Price Range" at page 32 of the
Registrant's 1994 Annual Report to Stockholders ("Annual Report") and is
incorporated herein by reference. At March 31, 1994, there were 906 stockholders
of record of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is set forth in the section
captioned "Five Year Financial Summary" at page 13 of the Registrant's 1994
Annual Report and is incorporated herein by reference.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 of Form 10-K is set forth in the section
captioned "Management's Discussion and Analysis" at pages 14 through 18 of the
Registrant's 1994 Annual Report and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is set forth in the
sections captioned "Quarterly Financial Data" and "Five Year Summary" at page 13
of the Registrant's 1994 Annual Report and the consolidated financial statements
and independent auditor's report thereon at pages 19 to 31 of the Registrant's
1994 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information is required by Part III is omitted from this Form 10-K
because the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A within 120 days after the end of its
fiscal year for its Annual Meeting of Stockholders to be held August 9, 1994,
and certain information included in the Proxy Statement is incorporated by
reference into this Part III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K with respect to directors
is incorporated by reference from the section captioned "Election of Directors"
in the Proxy Statement.
The information regarding executive officers required by this Item 10 is
set forth in Item 4 of Part I of this Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Election of
Directors: Remuneration" and "Executive Compensation and Related Information" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Stock
Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated herein by
reference from the information obtained in the section captioned "Executive
Compensation and Related Information: Employment Contracts and Termination of
Employment Arrangements" of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements -- See Index to Financial Statements and
Financial Statement Schedules at page 23 of this Report.
(2) Financial Statement Schedules -- See Index to Financial Statements and
Financial Statement Schedules at page 23 of this Report.
(3) Exhibits -- See Exhibit Index at page 20 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended March 31, 1994.
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- - - ------ ----------------------------------------------------------------------------- ----
<S> <C> <C>
3.1 Registrant's Certificate of Incorporation, as amended........................ n.3
3.2 Registrant's Bylaws, as amended.............................................. n.6
4.1 Indenture dated as of May 15, 1989, between Registrant and Morgan Guaranty
Trust Company of New York.................................................... n.4
4.2 Rights Agreement dated as of August 15, 1989 between the Registrant and The
First National Bank of Boston, as amended.................................... n.6
4.3 Certificate of Designations of Series A Junior Participating Preferred Stock
filed with the Secretary of State of Delaware on August 24, 1989. (Exhibit
4.1 in the Registrant's Form S-8 Registration Statement.).................... n.5
10.1 Agreement dated June 11, 1987 between Registrant and International Business
Machines Corporation. (Pursuant to Rule 24b-2, confidential portions of this
Agreement were deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.)................ n.1
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement, dated August 12,
1987, between Registrant and Lincoln Property N.C., Inc...................... n.2
10.7 Employment Agreement dated March 9, 1994, between the Registrant and
Joseph J. Francesconi.*......................................................
10.8 Employment Agreement dated January 8, 1993, between Registrant and
Raymond E. Peverell.*........................................................
10.9 Employment Agreement dated February 23, 1994, between the Registrant and
Craig M. Gentner.*...........................................................
10.10 Employment, Consulting and Severance Agreement dated November 19, 1993,
between the Registrant and Daniel J. Warmenhoven.*...........................
11.1 Statement Regarding Computation of Per Share Income..........................
13.1 1994 Annual Report to Stockholders. (Such Report, other than those portions
thereof that are expressly incorporated by reference herein, is furnished
solely for informational purposes and shall not be deemed to be "filed"
herewith.)...................................................................
21.1 Subsidiaries of Registrant...................................................
23.1 Independent Auditors' Consent................................................
99.1 Registrant's 1983 Stock Option Plan, as amended through May 24, 1993.*....... n.8
99.2 1988 Restricted Stock Award Plan.*........................................... n.7
99.3 Rules of the Registrant's 1988 U.K Stock Option Scheme.*..................... n.3
99.4 Registrant's 1989 U.K Stock Option Plan.*.................................... n.7
99.5 Registrant's 1990 Employee Stock Purchase Plan.*............................. n.9
99.6 Registrant's 1993 Stock Option Plan.*........................................ n.9
</TABLE>
NOTES
(1) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File No. 0-15323) for the fiscal year
ended March 31, 1987 filed with the Securities and Exchange Commission on
June 29, 1987.
(2) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File
20
<PAGE> 21
No. 0-15323) for the fiscal year ended March 31, 1988 filed with the
Securities and Exchange Commission on June 29, 1988.
(3) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File No. 0-15323) for the fiscal year
ended March 31, 1989 originally filed with the Securities and Exchange
Commission on May 1, 1989.
(4) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Form 8 Amendment No. 1 to Annual Report on Form 10-K (Commission File No.
0-15323) for the fiscal year ended March 31, 1989 filed with the Securities
and Exchange Commission on July 25, 1989.
(5) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Registration Statement on Form S8 (No. 33-33013 and 33-33063) filed with the
Securities and Exchange Commission on January 19, 1990.
(6) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File No. 0-15323) for the fiscal year
ended March 31, 1990 filed with the Securities and Exchange Commission on
June 29, 1990.
(7) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File No. 0-15323) for the fiscal year
ended March 31, 1991 filed with the Securities and Exchange Commission on
June 28, 1991.
(8) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Annual Report on Form 10-K (Commission File No. 0-15323) for the fiscal year
ended March 31, 1993 filed with the Securities and Exchange Commission on
June 25, 1993.
(9) Incorporated by reference from the corresponding Exhibit or the Exhibit
identified in parentheses previously filed as an Exhibit in the Registrant's
Registration Statement on Form S-8 (No. 33-68860) filed with the Securities
and Exchange Commission on September 15, 1993.
* A management contract or compensatory plan required to be filed as an
Exhibit to Form 10-K.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
(Registrant)
Date: June 24, 1994 By: /s/ JOSEPH J. FRANCESCONI
------------------------------------
Joseph J. Francesconi
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - - ------------------------------------------ ----------------------------------- --------------
<C> <S> <C>
/s/ JOSEPH J. FRANCESCONI President, Chief Executive Officer June 24, 1994
- - - ------------------------------------------ and Director (Principal Executive
Officer)
/s/ JOHN B. ARNOLD Chairman of the Board June 24, 1994
- - - ------------------------------------------
John B. Arnold
/s/ ROBERT H.B. BALDWIN Director June 24, 1994
- - - ------------------------------------------
Robert H.B. Baldwin
/s/ DIXON R. DOLL Director June 24, 1994
- - - ------------------------------------------
Dixon R. Doll
/s/ CRAIG M. GENTER Senior Vice President, Chief June 24, 1994
- - - ------------------------------------------ Secretary (Principal Financial
Craig M. Gentner Officer and Principal Accounting
Officer)
/s/ WALTER J. GILL Vice President, Chief Technology June 24, 1994
- - - ------------------------------------------ Officer and Director
Walter J. Gill
/s/ DUWAYNE J. PETERSON, JR. Director June 24, 1994
- - - ------------------------------------------
DuWayne J. Peterson, Jr.
/s/ FRANK S. VIGILANTE Director June 24, 1994
- - - ------------------------------------------
Frank S. Vigilante
/s/ HANS A. WOLF Director June 24, 1994
- - - ------------------------------------------
Hans A. Wolf
</TABLE>
22
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet as of March 31, 1994 and 1993.............................. *
Consolidated Statement of Operations for the years ended March 31, 1994, 1993 and
1992................................................................................ *
Consolidated Statement of Cash Flows for the years ended March 31, 1994, 1993 and
1992................................................................................ *
Consolidated Statement of Stockholders' Equity for the years ended March 31, 1994,
1993 and 1992....................................................................... *
Notes to Consolidated Financial Statements............................................ *
Independent Auditors' Report.......................................................... *
</TABLE>
- - - ---------------
* Incorporated herein by reference from information contained on pages 19
through 31 of the Registrant's 1994 Annual Report to Stockholders.
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report......................................................... 24
Schedule I -- Marketable Securities -- Temporary Cash Investments.................... S-I
Schedule II -- Amounts Receivable From Related Parties and Underwriters, Promoters,
and Employees Other than Related Parties........................................... S-II
Schedule VIII -- Valuation and Qualifying Accounts................................... S-III
Schedule X -- Supplementary Income Statement Information............................. S-IV
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
Separate financial statements of the Registrant are omitted because the
Registrant is primarily an operating company and all subsidiaries included in
the consolidated financial statements filed, in the aggregate, do not have a
minority equity interest and/or long-term indebtedness to any person outside the
consolidated group in an amount which together exceeds 5% of total consolidated
assets at March 31, 1994.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
Network Equipment Technologies, Inc.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1994 and 1993, and for each
of the three years in the period ended March 31, 1994, and have issued our
report thereon dated April 19, 1994; such financial statements and report are
included in your 1994 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
Network Equipment Technologies, Inc. listed in the accompanying index to
financial statements and financial statement schedules. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche
San Jose, California
April 19, 1994
24
<PAGE> 25
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE I
MARKETABLE SECURITIES -- TEMPORARY CASH INVESTMENTS
MARCH 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
NUMBER OF CARRIED
SHARES, UNITS ON
OF PRINCIPAL MARKET BALANCE
NAME OF ISSUER AMOUNT COST VALUE SHEET
-------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C>
State Agencies
Colorado Student Obligation Bond Authority........ 1,000 $ 1,000 $ 1,000 $ 1,000
Commercial Paper
JP Morgan & Company............................... 2,000 1,964 1,969 1,964
Floating Rate
Note SE Banken.................................... 1,000 1,000 1,000 1,000
Medium Term/Corporate Notes
ACM Managed Income Series A....................... 10 1,000 1,000 1,000
CIT Group Holdings Inc............................ 1,000 1,000 1,000 1,000
General Electric Company.......................... 1,500 1,500 1,513 1,500
Province of Alberta............................... 1,000 1,000 1,026 1,000
Deere & Co........................................ 1,000 1,000 1,001 1,000
Australian Wheat Board............................ 1,000 1,000 999 1,000
PNC Bank.......................................... 2,000 2,000 1,996 2,000
World Bank Colts.................................. 750 750 765 750
Texaco Cap Inc.................................... 1,000 1,000 1,018 1,000
European Investment Bank.......................... 1,000 1,000 1,002 1,000
Inter-American Development Bank................... 400 400 417 400
Associates Corp. of North America................. 1,000 1,000 1,009 1,000
Bayerische Landesbank............................. 1,100 1,100 1,098 1,100
------- ------- -------
Total Temporary Cash Investments........ $17,714 $17,813 $17,714
======= ======= =======
</TABLE>
S-I
<PAGE> 26
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES
OTHER THAN RELATED PARTIES(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT END
DEDUCTIONS OF PERIOD
BALANCE AT ------------------------- -------------------
BEGINNING AMOUNTS AMOUNTS NOT
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT
-------------- ---------- --------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
For the year ended
March 31, 1992:
John Eddon....................... $107 -- -- $ 20(1) $20 $67
For the year ended
March 31, 1993:
John Eddon....................... $ 87 -- -- $ 20(1) $20 $47
For the year ended
March 31, 1994:
John Eddon....................... $ 67 -- -- $ 20(1) $20 $27
</TABLE>
- - - ---------------
(1) Amounts were forgiven and included in compensation expense.
S-II
<PAGE> 27
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER DEDUCTION/ AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE OFF OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended March 31, 1992:
Accounts receivable allowances.......... $1,727 -- $ 2,044(1) $ (1,581) $ 2,190
For the year ended March 31, 1993:
Accounts receivable allowances.......... $2,190 -- $ 3,219(1) $ (1,590) $ 3,819
For the year ended March 31, 1994:
Accounts receivable allowances.......... $3,819 -- $ 1,779(1) $ (2,403) $ 3,195
</TABLE>
- - - ---------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
S-III
<PAGE> 28
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO COSTS AND
EXPENSES FOR THE YEAR
ENDED MARCH 31,
------------------------------------------
ITEM 1992 1993 1994
---- ------ -------------------- ------
<S> <C> <C> <C> <C>
1. Maintenance and repairs............................ $2,014 --(1) --(1)
Depreciation and amortization of intangible
2. assets............................................. $4,016 $3,918 $3,664
3. Taxes, other than payroll and income taxes......... --(1) --(1) --(1)
4. Royalties.......................................... --(1) --(1) --(1)
5. Advertising costs.................................. --(1) --(1) --(1)
</TABLE>
- - - ---------------
(1) Did not exceed 1% of revenue.
S-IV
<PAGE> 1
EXHIBIT 13.1
The Premier Supplier of Enterprise Network Products for Information-Intensive
Organizations and Value-Added Network Service Providers Worldwide.
For over a decade, N.E.T. has manufactured and supported products for
enterprise networks. The largest and most successful carriers and end-user
organizations in the world rely on N.E.T. products to provide digital
communications services. Integrating data, voice, video and image
applications, these services include ATM, SONET, frame relay, ISDN and
internetworking. Enterprise networks based on N.E.T. products operate in
numerous countries around the globe. Designed for reliability, flexibility and
compliance with worldwide standards, N.E.T. products are backed by an
unparalleled service and support infrastructure. In partnership with leading
technology companies, N.E.T. offers solutions for today with a migration path
to tomorrow.
<PAGE> 2
Financial Highlights
<TABLE>
<CAPTION>
Highlights for Years Ended March 31,
(Dollars in thousands, except per share amounts) 1994 1993
- - - ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $237,672 218,846
Net loss (6,324) (11,097)
Primary and fully diluted net loss per share (0.38) (0.71)
Total assets 187,015 186,596
7 1/4% convertible subordinated debentures 68,625 68,625
Stockholders' equity 58,928 61,323
Number of employees 1,164 1,117
</TABLE>
<TABLE>
<CAPTION>
1994 Highlights by Quarter
(Dollars in thousands, except per share amounts) First Second Third Fourth
- - - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 54,581 $ 55,011 $ 61,245 $ 66,835
Net income (loss) (1,009) (1,545) 330 (4,100)
Net income (loss) per share (0.06) (0.09) 0.02 (0.24)
</TABLE>
Three bar graphs are depicted here with the following descriptions and
quarterly values:
<TABLE>
<CAPTION>
Revenue New Customers Revenue Per Employee
(Dollars in millions) (Dollars in thousands, annualized)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- - - --- -- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
54.6 55.0 61.2 66.8 33 31 23 51 195 197 212 227
</TABLE>
<PAGE> 3
To Our Shareholders
N.E.T. built its business on quality service, customer satisfaction
and the value we add to enterprise network applications and operations. The
reliability of N.E.T.'s networking systems would be hard to match in any
industry. Our products handle billions of dollars of daily financial
transactions, provide non-stop support for continuous manufacturing processes
and form a resilient infrastructure for key military operations. In fact, our
systems are critical elements in virtually every industry that absolutely
cannot afford a network outage or service delay.
In fiscal year 1994, we reported the highest annual revenues in the
history of the Company -- $237.7 million. A record $66.8 million in revenues
was set in the final quarter, while adding a record 51 new customers and
increasing backlog. During the fourth quarter, over thirty percent of product
revenue was generated by new customers added during the year and total
annualized revenue per employee increased to $227,000.
There was substantial growth in product revenues from the SONET
Transmission Manager(TM) (STM(TM)) family of systems -- growing by 54.4 per
cent year-on-year. In the second half, product revenues from N.E.T.'s flagship
product family of IDNX(R) Communications Resource Managers (CRMs) increased by
10.9 percent compared with the same period last year. We achieved a number of
significant wins that launched substantial networks and, in some cases,
displaced competitors' systems.
Over the course of the year, N.E.T. won two of the largest enterprise
frame relay networks in the world -- PaineWebber and Pearl Assurance. Florida
Power and several cellular service providers significantly increased their
bandwidth potential and network resiliency with STM switches. Amoco and
Stanford University both established asynchronous transfer mode (ATM) trials
that include the N.E.T.(TM) ATMX(TM) switch. From a carrier perspective,
Sprint International and Eunetcom chose N.E.T.'s IDNX CRMs for multinational
VAN (Value-Added Network) backbones.
While we were gratified by these achievements, return to shareholders
was disappointing. Operating expenses were high and our increasing investment
in ATM technology did not produce significant revenue in fiscal 1994. First
generation ATM products were used by our customers primarily in small trials
rather than in applications with large revenue potential.
Thus, we took actions in the fourth quarter of fiscal 1994 to improve
overall performance. We tightened the focus of both our market and product
strategies and reorganized the Company to reduce costs and establish a
realistic business plan for fiscal 1995.
<PAGE> 4
We narrowed our market strategy to leverage our core competencies.
Our strengths are in two strategic markets: enterprise backbone networks that
include campus and wide-area network applications and multinational Value-Added
Networks. N.E.T. is a recognized leader in these two markets. The largest and
most successful carriers and end-user organizations in the world rely on N.E.T.
products and service to provide mission-critical networking capabilities.
In recognition of the strategic importance of ATM technology to all of
N.E.T.'s markets, we redirected our ATM product strategy to align with our
traditional enterprise networking strengths. The former ADAPTIVE(TM) Division
was integrated into the engineering, sales and marketing line organizations of
N.E.T. to leverage its ATM development expertise and to accelerate development
of second generation products.
These changes complete the consolidation of subsidiaries and divisions
into a "single" N.E.T. -- with a single mission.
The past year proved to be one of mixed results, but it was a year in
which we made important decisions to redirect the Company. We believe that
these actions have significantly enhanced our ability to meet our challenges
and to take full advantage of future opportunities.
Sincerely,
Joseph J.Francesconi
President and Chief Executive Officer
John B. Arnold
Chairman
Photograph: President & Chairman
John B. "Jack" Arnold has been an N.E.T. Board Member since the
Company's early days and Chairman since early 1994. Joseph J. "Joe"
Francesconi was recruited as President and CEO of N.E.T. in March of
1994. He brings 20-plus years of enterprise computing and networking
expertise to the position.
<PAGE> 5
Superior Support for Premier Product
At N.E.T. we recognize the issues close to the hearts of our clients.
These information-intensive enterprises run heartbeat networks - -
information flow is their business lifeblood, and outages or service
delays could severely impact their livelihoods. As the first vendor
to understand the value of superior support to the enterprise
networking community, N.E.T. developed the team and tools demanded by
the world's most demanding networks. N.E.T. Client Support is
acknowledged as the best there is.
In fact, N.E.T. sets the industry standard for outstanding service and
support. In two successive Users' Choice surveys, N.E.T. was voted
top in all eight service categories*. Our Technical Assistance
Centers (TACs) scored 25% higher than the hotline support average, and
resolve over 75% of network problems remotely.
Users also voted N.E.T.'s IDNX top in all eight product categories*.
No wonder much of the world's most critical information relies upon
N.E.T. networks. We can provide a level of resilience and support
uniquely suited to each client.
* Data Communications Magazine 1990 & 1992
AirTouch Cellular, a leading cellular communications provider, has
recently chosen N.E.T. to supply equipment for its cellular backbone
network. "There is a close alignment in the vision of quality held by
N.E.T. and AirTouch Cellular," said Owen Lichtenwalner, network
director of AirTouch Cellular. "This was evidenced throughout the
procurement, installation and cut-over processes. We are impressed
with N.E.T.'s level of support - it is prompt and thorough."
By providing an efficient, manageable network solution, N.E.T. has
enabled AirTouch staff to "focus on important network issues, while
increasing the productivity of engineering and operations personnel,"
according to Lichtenwalner. "We have a true partnership," he added.
Our reputation for premier backbone networking is built on network
reality: our support for heartbeat networks allows managers to sleep
at night
<PAGE> 6
Top Technology and Network Knowledg
N.E.T.'s success is founded on technology leadership combined with
backbone networking expertise. Our innovations target network
problems experienced by information-intensive organizations. Our
experience -- gained over the last decade dealing with the world's
most critical network applications -- enables our clients to minimize
their stress in managing heartbeat networks.
We introduced the intelligent network as a flexible, cost-effective
solution for the integration of applications across the wide-area.
Our IDNX platform was the first to enable enterprises to fully
leverage their backbone networks for their own competitive advantage.
Recognizing the value of this approach in today's data-intensive
business environment, N.E.T.'s STM family of SONET-based transmission
managers extends that advantage into the broadband arena.
Continuing the Company's technological lead, N.E.T. has developed a
powerful set of networking solutions for the embryonic ATM
marketplace. N.E.T. clients have an evolutionary path to integrate
ATM on existing and planned N.E.T. platforms.
Advantis, a network technology company, is using a range of N.E.T.
products to enable multinational outsourcing services for large
information-intensive enterprises.
With more than 240 nodes, Advantis' backbone requires intelligent
network platforms capable of responding to changing network conditions
automatically. By rapidly rerouting traffic around failures, N.E.T.'s
platforms allow network operators time to concentrate on higher-level
management activities.
"We are impressed by N.E.T.'s circuit-switched technology and the
expertise of their people," said Joan Corley, director of network
engineering for Advantis.
"As a provider of network services, networked applications and network
outsourcing, Advantis knows the challenges networking presents and
requires an experienced equipment vendor, like N.E.T., to understand
and resolve network issues quickly and competently. Together, we make
a great team."
Our reputation for premier backbone networking is built on network
reality: our success is based on top technology and network knowledge
<PAGE> 7
Enterprise Expertise
N.E.T. is the premier backbone network supplier for enterprises
worldwide. Our networks manage bandwidth for financial transactions,
manufacturing systems and defense operations around the clock and
around the globe.
To continue to excel in our specialist markets, the entire Company is
targeted on N.E.T.'s primary mission -- being the premier supplier of
enterprise networks for information-intensive organizations and
multinational Value-Added Network (VAN) service providers worldwide.
Our prestigious client base includes many leading enterprises, engaged
in: financial services and stock exchanges; airline reservations; auto
manufacturing; pharmaceutical production; oil and gas industries; and
government activities around the world.
N.E.T. understands the backbone networking needs of these enterprises.
By building on our traditional strengths, leveraging our technology
leadership with ATM and working with our strategic partners, we will
continue to address enterprise networking needs from the wide-area to
the campus.
With decreasing defense budgets and a changing geo-political
landscape, the Defense Information Systems Agency (DISA) needed to
consolidate many separate networks to more effectively provide
communications to the warfighter.
The technology exists to make it happen. N.E.T.'s IDNX CRM is the
platform of choice to achieve DISA's goal of an integrated Defense
Information Systems Network (DISN).
Over the last three years, the U.S. Department of Defense has
purchased more than 300 IDNX nodes for installation at military and
defense locations worldwide. DISA provides the implementation,
management and operations oversight for this extensive network.
N.E.T. is working with DISA to provide a global, seamless
infrastructure that will support voice, video and data applications
that enhance the effectiveness of forces around the world.
Our reputation for premier backbone networking is built on network
reality: enterprises trust us to handle their vital assets around the
clock
<PAGE> 8
Adding Value to VANs
N.E.T. is the premier backbone network supplier to multinational
Value-Added Network (VAN) service providers worldwide. This market is
growing rapidly, resulting in some of the world's largest backbone
networks.
Already, N.E.T.'s IDNX CRM is the platform of choice for the leading
multinational VAN service providers. The challenge of global
networking is to provide a seamless, resilient infrastructure
consisting of standard platforms which can be tuned to suit local
conditions. IDNX networks meet this challenge. Renowned for their
reliability and flexibility, they enable a wide range of service
offerings to be provisioned cost-effectively.
Our client list includes the world's top multinational Value-Added
Network service providers, such as: AT&T Business Communications
Services; the BT/MCI joint venture; Eunetcom; Infonet Services
Corporation; and Sprint International.
N.E.T. understands the backbone networking needs of these
organizations. Continued dedication to their specific requirements is
N.E.T.'s primary mission -- being the premier supplier of enterprise
networks for information-intensive organizations and multinational VAN
service providers worldwide.
Sprint International, Sprint's global telecommunications subsidiary,
will provide flexible voice, data, messaging and video services on its
new IDNX CRM-based global backbone network.
"The deployment of the IDNX CRM provides a flexible, reliable,
cost-efficient platform to integrate our multiple networks into one
single network for rapid growth," said Dominique Jacquet, Vice
President of Operations for Sprint International. "After extensive
analysis, we chose N.E.T. based on the flexibility of the company as
well as its product flexibility."
"We value the IDNX CRM's distributed network intelligence -- this
allows Sprint International to achieve its mission to provide very
high-quality service at low-cost. For instance, N.E.T.'s solution
doubles the cost-efficiency of bandwidth usage, drastically increases
our network surveillance capabilities and significantly reduces
transmission costs," explained Jacquet.
Our reputation for premier backbone networking is built on network
reality: our reliability and flexibility are valued by global service
providers
<PAGE> 9
FINANCIAL REVIEW
<TABLE>
<S> <C>
Quarterly Financial Data
Five Year Financial Summary 13
---------------------------------------------
Management's Discussion
and Analysis 14
---------------------------------------------
Consolidated
Balance Sheet 19
---------------------------------------------
Consolidated Statement
of Operations 20
---------------------------------------------
Consolidated Statement
of Cash Flows 21
---------------------------------------------
Consolidated Statement
of Stockholders' Equity 22
---------------------------------------------
Notes to Consolidated
Financial Statements 23
---------------------------------------------
Independent Auditors'
Report 31
---------------------------------------------
Common Stock Dividends
and Price Range 32
---------------------------------------------
Corporate Directory 33
=============================================
</TABLE>
<PAGE> 10
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Quarter 1994 1st 2nd 3rd 4th
- - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $54,581 $55,011 $61,245 $ 66,835
- - - -----------------------------------------------------------------------------------------------------------
Gross margin 27,529 28,071 30,897 29,251
- - - -----------------------------------------------------------------------------------------------------------
Net income (loss) (1,009) (1,545) 330 (4,100)
- - - -----------------------------------------------------------------------------------------------------------
Primary and fully diluted earnings (loss) per share (.06) (.09) .02 (.24)
- - - -----------------------------------------------------------------------------------------------------------
Fiscal Quarter 1993 1st 2nd 3rd 4th
- - - -----------------------------------------------------------------------------------------------------------
Revenue $51,444 $53,986 $56,110 $ 57,306
- - - -----------------------------------------------------------------------------------------------------------
Gross margin 28,815 29,357 29,353 31,405
- - - -----------------------------------------------------------------------------------------------------------
Net income (loss) 1,622 1,562 1,186 (15,467)
- - - -----------------------------------------------------------------------------------------------------------
Primary and fully diluted earnings (loss) per share .10 .10 .08 (.97)
- - - -----------------------------------------------------------------------------------------------------------
</TABLE>
Results for the fourth quarter of fiscal 1994 include a charge of $5.5 million,
or $0.32 per share, for excess inventory and other costs related to
streamlining the Company's operations. See Management's Discussion and
Analysis.
Results for the fourth quarter of fiscal 1993 include restructuring and other
non-recurring charges of $17.0 million, or $1.08 per share. See the
restructuring and other non-recurring charges footnote in the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis.
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31, 1994 1993 1992 1991 1990
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $237,672 $218,846 $180,805 $135,013 $180,800
Income (loss) before extraordinary credit (6,324) (11,097) (11,213) (49,559) 13,473
Net income (loss) (6,324) (11,097) (11,213) (46,111) 13,473
Primary earnings (loss) per share:
Income (loss) before extraordinary credit (.38) (.71) (.76) (3.47) .93
Net income (loss) (.38) (.71) (.76) (3.23) .93
7-1/4% convertible subordinated debentures 68,625 68,625 68,625 68,625 75,000
Other long-term obligations - 52 1,212 2,900 5,557
Total assets 187,015 186,596 178,605 171,723 233,982
</TABLE>
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes. The Company's fiscal 1994
operating results may be affected by a number of factors, trends, and
risks--many beyond the Company's control. These factors include, among others:
trends in new technologies; competitive pressures in the form of new products
or price reductions on current products; changes in product mix; changes in
domestic and international economic and/or political conditions or regulations,
and other factors identified below.
RESULTS OF OPERATIONS
The following table depicts selected data derived from the consolidated
statement of operations expressed as a percentage of revenue for each of the
three years in the period ended March 31, 1994:
<TABLE>
<CAPTION>
Percent of Revenue 1994 1993 1992
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product revenue 69.8 74.3 79.4
Service and other revenue 30.2 25.7 20.6
- - - -------------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
- - - -------------------------------------------------------------------------------------------------------------
Product revenue gross margin 56.2 61.7 62.8
Service and other revenue gross margin 31.4 33.0 37.6
- - - -------------------------------------------------------------------------------------------------------------
Total gross margin 48.7 54.3 57.6
- - - -------------------------------------------------------------------------------------------------------------
Sales and marketing 29.9 28.9 31.9
Research and development 14.2 14.7 15.8
General and administrative 5.6 6.3 7.8
Restructuring and other non-recurring charges 0.0 7.7 0.0
- - - -------------------------------------------------------------------------------------------------------------
Total operating expenses 49.7 57.6 55.5
- - - -------------------------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------------------------
Income (loss) from operations (1.0) (3.3) 2.1
- - - -------------------------------------------------------------------------------------------------------------
Settlement of litigation 0.0 0.0 (7.4)
Interest income 0.6 1.0 1.6
Interest expense (2.2) (2.4) (3.2)
Other (0.1) (0.4) (0.1)
- - - -------------------------------------------------------------------------------------------------------------
Loss before income tax (2.7) (5.1) (7.0)
- - - -------------------------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------------------------
Net loss (2.7) (5.1) (6.2)
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF 1994 AND 1993
REVENUE
Total revenue in fiscal 1994 increased $18.8 million or 8.6% from fiscal 1993.
Product revenue and service and other revenue increased $3.3 million and $15.5
million, respectively, for this year. The 2.0% increase in product revenue is
principally due to increased STM sales in the U.S. partially offset by lower
IDNX sales in Europe. Service and other revenue increased 27.6% from the prior
year. This increase is attributable to higher service revenues coming from
increases in the installed base of the Company's products as well as increases
in system integration services in support of product sales to the U.S.
government. Overall, international sales decreased 3.0% over last year and in
fiscal 1994 represented 22.0% of the Company's total revenue as compared to
24.7% in fiscal
<PAGE> 12
1993. Sales to the U.S. government grew 23.4% over last year and in fiscal
1994 represented 27.5% of total revenue compared to 24.2% in fiscal 1993.
GROSS MARGIN
Total gross margin as a percentage of total revenue decreased to 48.7% in
fiscal 1994 from 54.3% in fiscal 1993. Both product and service and other
revenue gross margins contributed to this decline. Product gross margin
decreased to 56.2% in fiscal 1994 from 61.7% in fiscal 1993. Negatively
impacting product margin was a $3.8 million charge to cost of product revenue
related to a writedown of excess ATMX inventory and fixed assets. Excluding
this writedown, product gross margin would have been 58.5%. Part of the
remaining decrease resulted from unfavorable manufacturing variances from lower
production volumes in the first half of fiscal 1994. In addition, higher gross
margin due to a favorable sales channel mix was offset by an increase in sales
discounts related to new marketing programs. The gross margin for service and
other revenue declined to 31.4% in fiscal 1994 from 33.0% in fiscal 1993 due to
a significantly higher mix of lower margin system integration services provided
under a U.S. government contract. In addition, the gross margin on these
system integration services declined to 9.9% in fiscal 1994 from 14.7% in
fiscal 1993 due to the mix of OEM products and services provided.
OPERATING EXPENSES
Operating expenses decreased $8.0 million in fiscal 1994. Excluding the $17.0
million restructuring and other non-recurring charges in fiscal 1993, operating
expenses increased $9.0 million. Excluding these charges, operating expenses
as a percentage of total revenue decreased to 49.7% in fiscal 1994 from 49.8%
in fiscal 1993. As management continues to focus on streamlining the Company's
operations, it expects the relationship of operating expense as a percentage of
total revenue to decrease.
Sales and marketing expense increased $7.9 million in fiscal 1994 and increased
as a percentage of total revenue to 29.9% in fiscal 1994 from 28.9% in fiscal
1993. The dollar increase is primarily the result of additional headcount to
support revenue growth throughout the Company's product and service channels.
Sales and marketing expense in fiscal 1994 also includes a fourth quarter
charge of $1.7 million for severance costs related to streamlining the
Company's operations.
Research and development expense increased $1.5 million in fiscal 1994 as
compared to fiscal 1993. The expense as a percentage of total revenue
decreased to 14.2% in fiscal 1994 from 14.7% in fiscal 1993. The dollar
expense increase in fiscal 1994 primarily reflects costs associated with the
Company's development of ATM products, which was partially offset by
development funds received as a result of the Company's ATM development
agreement with Ericsson Business Networks AB. In fiscal 1994, $2.7 million of
software costs were capitalized as compared to $3.4 million in fiscal 1993.
Management plans to continue funding research and development efforts at levels
necessary to advance product programs. At the same time, it is management's
intention to increase the focus of these development efforts and therefore keep
research and development spending dollars at levels comparable with fiscal
1994.
General and administrative expense in fiscal 1994 decreased both in dollars,
$.5 million, and as a percentage of total revenue. In fiscal 1994, expenses as
a percentage of total revenue were 5.6% as compared to 6.3% in fiscal 1993.
The dollar decrease was primarily due to lower personnel costs.
Interest income in fiscal 1994 decreased $.7 million from fiscal 1993 due to
lower interest rates. Interest expense, primarily related to the 7-1/4%
convertible subordinated debentures, remained unchanged at $5.3 million for
fiscal 1994 and fiscal 1993. The $.6 million decrease in other expense is
principally the result of a reduction in foreign currency exchange losses in
fiscal 1994 as compared to fiscal 1993.
Due to the operating loss in fiscal 1994, the Company has not recorded a tax
provision in the current year. The Company will carryforward this net
operating loss. Tax benefits related to the current year can be recognized to
the extent they are expected to be realized in future profitable periods. Due
to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future returns, the Company has not recorded any
income tax benefit for fiscal 1994.
<PAGE> 13
COMPARISON OF 1993 AND 1992
REVENUE
Total revenue in fiscal 1993 increased $38.0 million, or 21.0%, from fiscal
1992. Product revenue and service and other revenue each increased $19.0
million. The 13.2% increase in product revenue is principally due to sales to
new international IDNX customers and growth in U.S. government related product
revenue. Service and other revenue increased 51.2% from the prior year. This
increase is mainly attributable to system integration services in support of
product sales to the U.S. government, and to a lesser extent, to continued
increases in the installed base of the Company's products. Overall,
international sales grew 38.4% over the prior year and in fiscal 1993
represented 24.7% of total revenue compared to 21.6% in fiscal 1992. Sales to
the U.S. government grew 95.6% over the prior year and in fiscal 1993
represented 24.2% of total revenue compared to 15.0% in fiscal 1992.
GROSS MARGIN
Total gross margin as a percentage of total revenue decreased to 54.3% in
fiscal 1993 from 57.6% in fiscal 1992. Both product and service and other
revenue gross margins contributed to this decline. Product gross margin
decreased to 61.7% in fiscal 1993 from 62.8% in fiscal 1992 due to higher
levels of new product sales and increased sales to the U.S. government, which
both have lower gross margins. Also, gross margin was negatively impacted by
increased warranty and royalty expenses. The gross margin for service and
other revenue declined to 33.0% in fiscal 1993 from 37.6% in fiscal 1992 due to
a significantly higher mix of lower margin system integration services provided
under a U.S. government contract.
OPERATING EXPENSES
Operating expenses increased $25.7 million in fiscal 1993 and increased as a
percentage of total revenue to 57.6% from 55.5% in fiscal 1992. The increase
in this percentage is due to the $17.0 million restructuring and other
non-recurring charges which is partially offset by decreases in other areas as
discussed below.
Sales and marketing expense increased $5.4 million in fiscal 1993 but decreased
as a percentage of total revenue to 28.9% in fiscal 1993 from 31.9% in fiscal
1992. The dollar increase is primarily the result of the addition of personnel
to support international revenue growth and expansion of the N.E.T. Federal
subsidiary. This increase offset lower sales commissions in fiscal 1993 due to
changes in sales compensation plans.
Research and development expense increased $3.7 million in fiscal 1993 as
compared to fiscal 1992. The expense as a percentage of total revenue
decreased to 14.7% in fiscal 1993 from 15.8% in fiscal 1992. The dollar
increase in fiscal 1993 reflects costs associated with the development of new
products and enhancements to existing product lines. In fiscal 1993, $3.4
million of software costs were capitalized as compared to $3.0 million in
fiscal 1992.
General and administrative expense in fiscal 1993 decreased both in dollars,
$.5 million, and as a percentage of total revenue. In fiscal 1993, expenses
as a percentage of total revenue were 6.3% as compared to 7.8% in fiscal 1992.
The dollar decrease was primarily due to lower personnel costs.
In the fourth quarter of fiscal 1993, the Company incurred $17.0 million in
restructuring and other non-recurring charges. This charge resulted from
management actions to refocus its product lines, to close its Santa Barbara
manufacturing operation and to integrate its ADAPTIVE subsidiary into the
Company. The charge consisted of $7.0 million for the acquisition of the
minority interest in ADAPTIVE, $3.0 million for the integration of ADAPTIVE
into N.E.T., $2.6 million for the closure of the Access Products Division
manufacturing operation in Santa Barbara and $4.4 million for the severance or
relocation of employees and other costs. Of the total $17.0 million charge,
$10.4 million represented cash charges and $6.6 million represented non-cash
charges, including Common Stock to be issued for the minority interest in
ADAPTIVE. Of the $10.4 million in cash charges, $8.7 million was required in
fiscal years 1993 and 1994 and $1.7 million of cash is expected to be required
in fiscal 1995.
<PAGE> 14
Interest income in fiscal 1993 decreased $.8 million from fiscal 1992 due to
lower interest rates offsetting higher cash balances. Interest expense
decreased by $.5 million due to the repayment of various capitalized leases.
Interest on the convertible subordinated debentures remained unchanged at $5.1
million for fiscal 1993 and fiscal 1992. The $.7 million increase in other
expense is the result of foreign currency exchange losses and additional state
franchise taxes.
BUSINESS ENVIRONMENT AND RISK FACTORS
In recent years the Company has experienced decreases in first quarter revenues
versus the preceding fourth quarter and this trend is expected to continue in
fiscal 1995.
Historically, the majority of the Company's revenues in each quarter results
from orders received and shipped in that quarter, and a significant proportion
of such revenues result from orders received and shipped in the last month of
the quarter. Because of these ordering patterns and potential delivery
schedule changes, the Company does not believe that backlog is indicative of
future revenue levels. Furthermore, if near term demand for the Company's
products weakens in a particular quarter, the Company's operating results for
that quarter would be adversely affected. Expense levels are relatively fixed
and are set based on expectations regarding future revenue levels. These
expectations involve making judgments on issues such as future competitive
conditions and customer requirements, a process that involves evaluation of
information that often is unclear and in conflict.
The Company's products include components, assemblies and subassemblies that
are currently available from single sources. Testing and manufacturing is
performed at the Company's Redwood City, California facility. Availability
limitations, price increases or business interruptions could adversely impact
revenue, margins and earnings.
Because of the factors described above, as well as others that may affect the
Company's operating results, past financial results may not be an accurate
indicator of future performance.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1994, the Company had cash, cash equivalents and temporary cash
investments of $41.6 million, as compared to $52.1 million at the end of fiscal
1993. Cash provided from operations was $2.2 million in fiscal 1994, a $20.7
million decrease over the prior year. This decrease was principally due to a
decrease in the restructuring reserve liabilities and increases in accounts
receivable and inventory partially offset by a smaller net loss and an increase
in current liabilities. Accounts receivable increased $6.9 million in fiscal
1994 from fiscal 1993 due to higher sales in the fourth quarter of fiscal 1994
as compared to the prior year period. Days sales outstanding as well as
accounts receivable over 90 days as a percentage of total accounts receivable
both decreased in fiscal 1994. Inventory levels increased $12.3 million in
fiscal 1994 from fiscal 1993, excluding the writedown of excess ATMX inventory.
This increase is principally due to the Company's efforts to improve product
availability; inventory for new product introductions and releases; and changes
in the fourth quarter sales mix.
Net cash used for investing activities in fiscal 1994 consisted primarily of
purchases of property and equipment of $14.2 million and an increase in
software production costs of $2.7 million offset by net sales of temporary cash
investments of $4.3 million.
Net cash provided by financing activities in fiscal 1994 is primarily composed
of $4.2 million from the issuance of Common Stock relating to the employee
stock benefit plans offset by $1.1 million in repayments of borrowings.
As of March 31, 1994, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed facility are available through May
1995 and bear interest at the bank's base rate (which approximates prime) and
base rate plus 0.5% on usage above $5.0 million. At March 31, 1994, there were
no outstanding borrowings under this facility.
<PAGE> 15
In fiscal 1993, the Board of Directors authorized the repurchase of up to one
million shares of N.E.T. Common Stock on the open market from time to time at
price levels the Company deems appropriate. The Company purchased 80,000
shares of its Common Stock for $.6 million during the first two quarters of
fiscal 1994.
The Company believes that current cash balances and cash flows from operations,
together with available sources of financing, will be sufficient to fund
operations, purchases of capital equipment and research and development
programs currently planned at least through fiscal 1995.
<PAGE> 16
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
1994 1993
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,854 $ 30,080
Temporary cash investments 17,714 22,022
Accounts receivable, net of allowances of $3,195 in 1994
and $3,819 in 1993 57,432 50,530
Inventories 34,456 23,755
Prepaid expenses and other assets 3,842 5,276
- - - -------------------------------------------------------------------------------------------------------------
Total current assets 137,298 131,663
- - - -------------------------------------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment 90,129 79,290
Furniture and fixtures 6,745 7,202
Leasehold improvements 10,713 9,699
Construction in progress 1,789 1,004
- - - -------------------------------------------------------------------------------------------------------------
109,376 97,195
Less accumulated depreciation and amortization (75,990) (60,959)
- - - ------------------------------------------------------------------------------------------------------------
Property and equipment, net 33,386 36,236
Software production costs, net 5,520 6,129
Other assets 10,811 12,568
- - - -------------------------------------------------------------------------------------------------------------
$187,015 $186,596
- - - -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,225 $ 15,624
Accrued liabilities 38,883 38,100
Notes payable and current portion of long-term obligations 26 1,048
- - - -------------------------------------------------------------------------------------------------------------
Total current liabilities 59,134 54,772
- - - -------------------------------------------------------------------------------------------------------------
Other long-term obligations - 52
Deferred income taxes 328 1,824
7-1/4% convertible subordinated debentures 68,625 68,625
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none - -
Common Stock to be issued 268 3,529
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 17,097,000 shares in 1994 and 16,042,000
shares in 1993 171 160
Additional paid-in capital 98,315 90,984
Accumulated translation adjustment (1,157) (1,005)
Accumulated deficit (38,669) (32,345)
- - - -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 58,928 61,323
- - - -------------------------------------------------------------------------------------------------------------
$187,015 $186,596
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 17
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31, 1994 1993 1992
- - - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product revenue $165,842 $162,542 $143,561
Service and other revenue 71,830 56,304 37,244
- - - ---------------------------------------------------------------------------------------------------------
Total revenue 237,672 218,846 180,805
- - - ---------------------------------------------------------------------------------------------------------
Cost of sales:
Cost of product revenue 72,647 62,181 53,434
Cost of service and other revenue 49,277 37,735 23,257
- - - ---------------------------------------------------------------------------------------------------------
Total cost of sales 121,924 99,916 76,691
- - - ---------------------------------------------------------------------------------------------------------
Gross margin 115,748 118,930 104,114
- - - ---------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 71,064 63,170 57,749
Research and development 33,736 32,200 28,478
General and administrative 13,229 13,680 14,135
Restructuring and other non-recurring charges - 17,000 -
- - - ---------------------------------------------------------------------------------------------------------
Total operating expenses 118,029 126,050 100,362
- - - ---------------------------------------------------------------------------------------------------------
Income (loss) from operations (2,281) (7,120) 3,752
Settlement of litigation - - (13,364)
Interest income 1,411 2,105 2,866
Interest expense (5,276) (5,274) (5,762)
Other (178) (808) (105)
- - - ---------------------------------------------------------------------------------------------------------
Loss before income taxes (6,324) (11,097) (12,613)
Income tax benefit - - 1,400
- - - ---------------------------------------------------------------------------------------------------------
Net loss $ (6,324) (11,097) $(11,213)
- - - ---------------------------------------------------------------------------------------------------------
Primary and fully diluted net loss per share $ (.38) (.71) $ (.76)
- - - ---------------------------------------------------------------------------------------------------------
Shares used in computation 16,778 15,721 14,826
- - - ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 18
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31, 1994 1993 1992
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 30,080 $ 20,132 $ 26,631
- - - -------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net loss (6,324) (11,097) (11,213)
Adjustments required to reconcile net loss to cash
provided by operations:
Depreciation and amortization 19,422 19,444 17,676
Restructuring and other non-recurring charges - 17,000 -
Warrants issued for settlement of litigation - - 7,080
Writedown of excess ATMX inventory and fixed assets 3,764 - -
Restricted stock compensation 391 518 517
Changes in assets and liabilities:
Accounts receivable (6,902) (2,756) (11,996)
Inventories (12,281) (4,628) (5,073)
Prepaid expenses and other assets (62) 92 (389)
Accounts payable 4,601 2,974 3,161
Accrued liabilities (net of restructuring reserves) (405) 1,386 9,925
- - - -------------------------------------------------------------------------------------------------------------
Net cash provided by operations 2,204 22,933 9,688
- - - -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of temporary cash investments (30,414) (35,758) (34,261)
Proceeds from sales of temporary cash investments 34,722 38,407 32,710
Additions to property and equipment (14,167) (15,193) (11,100)
Additions to software production costs (2,681) (3,441) (2,970)
Other 1,757 1,066 (2,927)
- - - -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (10,783) (14,919) (18,548)
- - - -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of Common Stock 4,179 4,408 5,052
Purchase of Common Stock (600) - -
Repayments of borrowings (1,074) (1,645) (2,814)
Other (152) (829) 123
- - - -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,353 1,934 2,361
- - - -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,226) 9,948 (6,499)
- - - -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,854 $ 30,080 $ 20,132
- - - -------------------------------------------------------------------------------------------------------------
Other cash flow information:
Cash paid (refunded) during the year for:
Interest $ 5,276 $ 5,274 $ 5,762
Income taxes $ 65 $ (1,185) $ (7,951)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 19
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock Additional Accumulated
To Be Common Paid-In Translation Accumulated
Issued Stock Capital Adjustment Deficit
- - - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1991 $ - $144 $72,062 $ (299) $(10,035)
- - - ---------------------------------------------------------------------------------------------------------------------
Sale of 960,000 shares of Common
Stock, net of repurchases, under
employee stock benefit plans - 10 5,559 - -
Income tax benefit arising from
employee stock option plans - - 436 - -
Accumulated translation adjustment - - - 123 -
Issuance of warrants to purchase
1,500,000 shares of Common Stock - - 7,080 - -
Net loss - - - - (11,213)
- - - ---------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1992 - 154 85,137 (176) (21,248)
- - - ---------------------------------------------------------------------------------------------------------------------
Sale of 623,000 shares of Common
Stock, net of repurchases, under
employee stock benefit plans - 6 4,822 - -
Exercise of 23,000 warrants - - 240 - -
Income tax benefit arising from
employee stock option plans - - 785 - -
Accumulated translation adjustment - - - (829) -
Common Stock to be issued in
connection with merger 3,529 - - - -
Net loss - - - - (11,097)
- - - ---------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1993 3,529 160 90,984 (1,005) (32,345)
- - - ---------------------------------------------------------------------------------------------------------------------
Sale of 620,000 shares of Common
Stock, net of repurchases, under
employee stock benefit plans - 6 4,506 - -
Exercise of 6,000 warrants - - 58 - -
Stock issued in connection with merger (3,261) 6 3,255 - -
Purchase of 80,000 shares of
Common Stock - (1) (599) - -
Income tax benefit arising from
employee stock option plans - - 111 - -
Accumulated translation adjustment - - - (152) -
Net loss - - - - (6,324)
- - - ---------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1994 $ 268 $171 $98,315 $(1,157) $(38,669)
- - - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Revenue from service
and other contracts is recognized when service is performed or, in the case of
service contracts, ratably over the contract period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid debt investments with original
maturities of three months or less at the time of acquisition.
TEMPORARY CASH INVESTMENTS
Temporary cash investments are carried at amortized cost which approximates
market value. Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities," was issued
in May 1993. The Company will adopt SFAS 115 effective April 1, 1994.
Accordingly, the Company will classify its temporary cash investments as
"available for sale securities," and the carrying value of such securities will
be reported at fair market value, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity.
The Company believes that adoption of this statement will not have a material
impact on the financial position of the Company at April 1, 1994.
CONCENTRATION OF CREDIT RISK
The Company sells its products to primarily large companies in diversified
industries worldwide. Credit risk is further mitigated by the Company's credit
evaluation process and the reasonably short collection terms. The Company does
not require collateral or other security to support accounts receivable. While
the Company does maintain allowances for potential credit losses, actual bad
debt losses have not been material or outside of management's expectations.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead costs. Year-end inventories
consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased components $12,608 $ 9,824
Work-in-process 18,618 11,602
Finished goods 3,230 2,329
- - - -------------------------------------------------------------------------------------------------------------
$34,456 $23,755
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of generally three to five
years. Leased assets and leasehold improvements are amortized over the shorter
of the respective lease terms or estimated useful lives.
SOFTWARE PRODUCTION COSTS
Capitalization of software production costs begins upon the establishment of
technological feasibility for the products, and amortization begins when the
products are available for release to customers. The Company assesses the
recoverability of capitalized software production costs in light of many
factors, including anticipated future revenues, estimated economic useful lives
and changes in software and hardware technologies. Capitalization of software
production costs amounted to $2.7 million, $3.4 million and $3.0 million in
fiscal 1994, 1993 and 1992, respectively. Software production costs are
amortized over the lives of the products, generally three years. Amortization
amounted to $3.3 million, $3.6 million and $4.0 million in fiscal 1994, 1993
and 1992, respectively. Accumulated amortization was $18.0 million and $14.8
million at March 31, 1994 and 1993. During fiscal 1993 the Company recorded
$.8 million of reductions in the net realizable value of various capitalized
software products.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into dollars at
the rates of exchange in effect at the end of the period. Revenues and
expenses are translated at the average exchange rate during the period. Gains
and losses from foreign currency translation are included in a separate account
in stockholders' equity in the consolidated balance sheet. Foreign currency
transaction gains or losses are included in the consolidated statement of
operations. The Company enters into foreign exchange contracts to hedge
certain intercompany balances and balance sheet exposures against future
movements in foreign exchange rates. Gains and losses on the foreign exchange
contracts are included in other income and expense, which offset foreign
exchange gains or losses from revaluation of foreign currency-denominated
intercompany balances and balance sheet exposure items. At March 31, 1994, the
Company had outstanding foreign exchange contracts of $7.8 million. The
contracts require the Company to exchange foreign currencies for U.S. dollars
and generally mature in one month.
EARNINGS PER SHARE
Net income (loss) per share has been computed based upon the weighted average
number of common and common equivalent shares outstanding. For primary
earnings per share, common equivalent shares consist of the incremental shares
issuable upon the assumed exercise of dilutive stock warrants and stock
options. For fully diluted earnings per share, common equivalent shares also
include, if dilutive, the effect of incremental shares issuable upon the
conversion of the 7-1/4% convertible subordinated debentures, and net income
will be adjusted for the interest expense (net of income taxes) related to the
debentures.
NOTE 2: RESTRUCTURING AND OTHER NON-RECURRING CHARGES
In the fourth quarter of fiscal 1993, the Company announced plans to refocus
its product lines and to close certain manufacturing locations. These actions
resulted in the closure of the Company's Access Products Division manufacturing
operation, integration of the ADAPTIVE operations into N.E.T. and a reduction
in the number of employees.
The consolidated statement of operations for fiscal 1993 includes a charge of
$17.0 million. This charge consists of $7.0 million for the acquisition of the
minority interest in ADAPTIVE, $3.0 million for the integration of ADAPTIVE
into N.E.T., $2.6 million for the closure of the Access Products Division
manufacturing operation and $4.4 million for employee severance or relocation
and other costs. The $17.0 million charge reduced earnings per share by $1.08.
<PAGE> 22
NOTE 3: ACQUISITION OF MINORITY INTEREST
On March 31, 1993, N.E.T. and ADAPTIVE entered into an agreement for N.E.T. to
acquire the 20% interest in ADAPTIVE not previously owned by N.E.T. The cost
of this acquisition, $7.0 million, was comprised of Common Stock to be issued
(44,722 and 588,200 shares to be issued at March 31, 1994 and March 31, 1993,
respectively), cash ($1.5 million) and expenses and fees directly attributable
to the merger. The Company included the $7.0 million amount in the
restructuring and other non-recurring charges since management believes the
amount is attributable to the acquisition of research and development in
process that has no alternative future use.
NOTE 4: RELATIONSHIP WITH IBM
The Company has agreements with International Business Machines Corporation
(IBM), that provide, among other things, that IBM has non- exclusive, worldwide
marketing, installation and service rights for current and future releases of
the Company's IDNX and ADNX communications resource managers and certain
related products. IBM accounted for 11%, 15% and 20% of revenue in 1994, 1993
and 1992, respectively.
NOTE 5: SALES TO THE U.S. GOVERNMENT
Sales to the U.S. government and its agencies amounted to 28%, 24% and 15% of
revenue for fiscal years 1994, 1993 and 1992, respectively. These amounts
include sales, which amounted to 20%, 17% and 7% of revenue for fiscal years
1994, 1993 and 1992, respectively, under a contract with the Department of
Defense under which various government agencies (to date, primarily the Air
Force) can order products, installation and service from N.E.T.
NOTE 6: SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended March 31, 1994
(Dollars in thousands) United States Europe Eliminations Consolidated
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $207,482 $30,190 $ - $237,672
Sales to foreign affiliates 17,848 3,775 (21,623) -
- - - -------------------------------------------------------------------------------------------------------------
Total revenue $225,330 $33,965 $(21,623) $237,672
- - - -------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 2,563 $(3,648) $ (1,196) $ (2,281)
- - - -------------------------------------------------------------------------------------------------------------
Identifiable assets at year end $193,804 $22,805 $(29,594) $187,015
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1993
(Dollars in thousands) United States Europe Eliminations Consolidated
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $193,390 $25,456 $ - $218,846
Sales to foreign affiliates 10,665 1,940 (12,605) -
- - - -------------------------------------------------------------------------------------------------------------
Total revenue $204,055 $27,396 $(12,605) $218,846
- - - -------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (7,804) $ 973 $ (289) $ (7,120)
- - - -------------------------------------------------------------------------------------------------------------
Identifiable assets at year end $ 190,303 $ 3,372 $(17,079) $186,596
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31, 1992
(Dollars in thousands) United States Europe Eliminations Consolidated
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $163,517 $17,288 $ - $180,805
Sales to foreign affiliates 7,576 1,361 (8,937) -
- - - -------------------------------------------------------------------------------------------------------------
Total revenue $171,093 $18,649 $ (8,937) $180,805
- - - -------------------------------------------------------------------------------------------------------------
Operating income (loss) $ 5,406 $(1,573) $ (81) $ 3,752
- - - -------------------------------------------------------------------------------------------------------------
Identifiable assets at year end $182,073 $11,851 $(15,319) $178,605
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 23
Sales to foreign affiliates represent products which are transferred between
such affiliates on a basis intended to approximate arms-length prices as
negotiated by unrelated entities. Domestic sales to unaffiliated customers
include $22.0 million, $28.5 million and $21.7 million of export sales in
fiscal years 1994, 1993 and 1992, respectively.
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation $15,169 $11,736
Unearned income 7,326 7,137
Restructuring reserves 1,733 9,630
Other 14,655 9,597
- - - -------------------------------------------------------------------------------------------------------------
$38,883 $38,100
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8: FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1995 and would bear
interest at the bank's base rate (which approximates prime) and base rate plus
0.5% on usage above $5.0 million. At March 31, 1994, there were no outstanding
borrowings under the line of credit agreement.
NOTE 9: LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum lease
commitments under these leases as of March 31, 1994, were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- - - -------------------------------------------------------------------------------------------------------------
<S> <C>
1995 $ 7,646
1996 6,942
1997 6,565
1998 5,607
1999 3,468
After 1999 3,288
- - - -------------------------------------------------------------------------------------------------------------
$33,516
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
Rental expense under operating leases was $6.9 million, $6.8 million and $6.3
million for the three years ended March 31, 1994.
NOTE 10: CONVERTIBLE SUBORDINATED DEBENTURES
In May 1989, the Company issued $75.0 million of 7-1/4% convertible
subordinated debentures due May 15, 2014, in an underwritten public offering,
with net proceeds of $72.8 million. In September 1990, the Company repurchased
debentures in the face amount of $6.4 million. Each debenture is convertible
at the option of the holder into Common Stock at $31.50 per share and is
redeemable at the option of the Company at prices that decline from 103.625% of
face value on May 15, 1994 to 100% of face value on May 15, 1999. The
debentures are entitled to a sinking fund beginning May 15, 2000 of $3.8
million annually, calculated to retire 70% of the debentures prior to maturity.
At March 31, 1994, the market value of outstanding debentures was approximately
$56.1 million.
<PAGE> 24
NOTE 11: CAPITAL STOCK
The Company's Board of Directors has approved a plan to protect stockholders'
rights in the event of a proposed takeover of the Company. Under the plan, as
amended in June 1990, a preferred share purchase right ("Right") is attached to
each share of Common Stock. The Rights are exercisable only after a person or
group acquires beneficial ownership of 15% or more of the Company's Common
Stock or commences a tender or exchange offer that would result in 20% or more
of Common Stock ownership. Each Right initially entitles stockholders to buy
one one-hundredth of a share of a new series of participating preferred stock
at an exercise price of $120. If the Company is acquired in a merger or other
transaction with a person or group, or sells 50% or more of its assets or
earning power to such a person or group, each Right not owned by such acquiring
person will entitle its holder to obtain on exercise of the Right a number of
the acquiring company's common shares having a market value at the time of
twice the Right's then-current exercise price. If a person or group acquires
15% or more of the Company's outstanding Common Stock, each Right will entitle
its holder to obtain on exercise of the Right a number of shares of Common
Stock (or equivalent) having a market value of twice the Right's then-current
exercise price. After a person or group has acquired 15% of the outstanding
shares of Common Stock but before their acquisition of 50% or more of the
Common Stock, the Board of Directors may exchange one share of Common Stock or
equivalent fractions of preferred stock for each Right. The Company can redeem
the Rights at $.01 per Right at any time until the tenth day following the
acquisition by a person or group of 15% of the Company's Common Stock. The
Rights are also redeemable thereafter in certain circumstances. The Rights
expire on August 24, 1999, unless earlier redeemed or exchanged.
As of March 31, 1994, the Company had reserved shares of its Common Stock for
the following purposes:
<TABLE>
<CAPTION>
Reserved
- - - -------------------------------------------------------------------------------------------------------------
<S> <C>
Stock option and restricted stock award plans:
Outstanding (at $4.00 to $29.88 per share) 4,174,735
Available for grant 966,985
Employee stock purchase plan 811,435
Shares to be issued in connection with merger 44,722
</TABLE>
Under the Employee Stock Purchase Plan, the Company's employees, subject to
certain restrictions, may purchase shares of Common Stock at a price equal to
at least 85% of the fair market value.
Under the Restricted Stock Award Plan, the Company may issue up to 750,000
shares of Common Stock to key employees at $.01 per share. Shares awarded
under the Plan are issued twelve months from the original award date and carry
certain restrictions on transferability, which lapse over the vesting period
(generally four years). As of March 31, 1994, 167,500 shares at $.01 per share
have been awarded, issued and fully expensed under the Plan. Related
compensation expense totaled $391 thousand, $518 thousand and $517 thousand for
the years ended March 31, 1994, 1993 and 1992, respectively.
On March 30, 1992, the Company issued one and one-half million warrants in
conjunction with the settlement of securities litigation lawsuits to members of
the plaintiff class. The warrants gave holders the right to purchase the
Company's Common Stock at a price of $10.25 per share. As of March 30, 1994,
29,029 warrants had been exercised and all remaining warrants expired.
The Company has authorized 5,000,000 shares of $.01 par value Preferred Stock.
This stock, if issued, will carry liquidation preferences and other rights, as
determined by the Board of Directors. As of March 31, 1994, no preferred
shares were outstanding.
<PAGE> 25
NOTE 12: EMPLOYEE STOCK OPTION PLANS
Under the Company's stock option plans, options generally become exercisable
ratably over a four year period and expire after seven to ten years. Options
may be granted to officers, key employees, directors and independent
contractors to purchase Common Stock at a price not less than 100% of fair
market value at the date of grant.
Activity in the Company's option plans is summarized below:
<TABLE>
<CAPTION>
Shares Option Prices
- - - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at March 31, 1991 3,533,368
Granted 1,501,850 $7.63 - $16.75
Exercised (663,698) .75 - 13.25
Cancelled (347,545) .75 - 28.33
- - - ----------------------------------------------------------------------------------------------------------------
Options outstanding at March 31, 1992 4,023,975
Granted 394,332 8.75 - 14.63
Exercised (358,574) 1.44 - 9.50
Cancelled (415,227) 1.44 - 28.33
- - - ----------------------------------------------------------------------------------------------------------------
Options outstanding at March 31, 1993 3,644,506
Granted 1,579,450 6.00 - 10.63
Exercised (364,468) 6.75 - 11.00
Cancelled (684,753) 5.75 - 26.50
- - - ----------------------------------------------------------------------------------------------------------------
Options outstanding at March 31, 1994 4,174,735 $4.00 $29.88
- - - ----------------------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1994, options for 2,091,212 shares were exercisable at prices
ranging from $4.00 to $29.88 per share.
NOTE 13: INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which prescribes an asset and liability method of
income tax accounting.
Income (loss) before income taxes and the provision (benefit) for income taxes
consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $(2,333) $(11,323) $(10,574)
Foreign (3,991) 226 (2,039)
- - - -------------------------------------------------------------------------------------------------------------
$(6,324) $(11,097) $(12,613)
- - - -------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current:
Federal $ - $ - $ (1,400)
State - - -
- - - -------------------------------------------------------------------------------------------------------------
(1,400)
- - - -------------------------------------------------------------------------------------------------------------
Deferred:
Federal - - -
State - - -
- - - -------------------------------------------------------------------------------------------------------------
- - -
- - - -------------------------------------------------------------------------------------------------------------
$ - $ - $ (1,400)
- - - -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
The effective income tax rate differed from the statutory federal rate due to
the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax benefit at 34% $ (2,150) $ (3,773) $(4,288)
Limitation on use of net operating loss and tax credit
carryforwards and effect of alternative minimum tax 793 2,150 1,998
Effect of foreign losses 1,357 (77) 693
Nondeductible merger costs - 1,700 -
Other - - 197
- - - ------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ - $ - $(1,400)
- - - ------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of the temporary differences between income for financial
reporting and tax return purposes for the years ended March 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital leases treated as operating for tax purposes $ 501 $ 627 $ 919
Effect of net operating losses (1,699) 5,108 (683)
Effect of credit carryforwards 170 (825) -
Capitalized software production costs (568) (47) (308)
Depreciation (2,227) (380) (736)
Restructuring costs 3,899 (4,750) -
Reserves not currently deductible for tax purposes (1,747) (1,038) 808
Change in valuation allowance 1,671 1,305 -
- - - ------------------------------------------------------------------------------------------------------------
Net amount $ - $ - $ -
- - - ------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax liabilities (assets) are comprised of the following at March 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
- - - --------------------------------------------------------------------------------------------
<S> <C> <C>
Capital leases treated as operating for tax purposes $ 7,250 $ 6,749
Capitalized software production costs 2,208 2,776
- - - --------------------------------------------------------------------------------------------
Gross deferred tax liabilities $ 9,458 $ 9,525
- - - --------------------------------------------------------------------------------------------
Reserves not currently deductible for tax purposes $ (7,836) $ (6,089)
Depreciation (8,967) (6,740)
Restructuring costs (851) (4,750)
Loss carryforwards (7,271) (5,572)
Credit carryforwards (4,994) (5,164)
- - - --------------------------------------------------------------------------------------------
Gross deferred tax assets $(29,919) $(28,315)
Deferred tax assets valuation allowance $ 20,461 $ 18,790
- - - --------------------------------------------------------------------------------------------
Net deferred tax assets $ (9,458) $ (9,525)
- - - --------------------------------------------------------------------------------------------
Net deferred tax liabilities (assets) $ - $ -
- - - --------------------------------------------------------------------------------------------
</TABLE>
These deferred taxes are presented in the balance sheet as deferred income tax
liabilities of $.3 million and $1.8 million as of March 31, 1994 and 1993,
respectively, offset by deferred tax assets in the same amount which are
classified as prepaid expenses and other assets.
Due to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance of approximately $20.5 million and $18.8 million as of
March 31, 1994 and 1993, respectively, against its otherwise recognizable
deferred tax assets.
<PAGE> 27
As of March 31, 1994, the Company has federal income tax net operating loss
carryforwards of $10.7 million, expiring in years 2007 through 2009. The
Company has available federal tax credit carryforwards of $3.3 million,
expiring in 2000 through 2007, and alternative minimum tax credit carryforwards
of $1.7 million, available indefinitely. Foreign tax loss carryforwards of
$6.3 million are available for use in reducing taxable income in certain
foreign jurisdictions.
NOTE 14: EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan, whereby
eligible employees may contribute a percentage of their eligible compensation
(presently from 1% to 17% to a maximum of approximately $9 thousand per year).
Company contributions are discretionary and were $750 thousand, $652 thousand
and $270 thousand for fiscal 1994, 1993 and 1992, respectively.
NOTE 15: LITIGATION
In the second quarter of fiscal 1992, the Company recorded a charge of $13.4
million for the settlement of all pending consolidated class action securities
litigation lawsuits. As part of the principal terms of the agreement, the
Company issued to members of the plaintiff class warrants to purchase the
Company's Common Stock. The warrants expired March 30, 1994.
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND DIRECTORS OF
NETWORK EQUIPMENT TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended March 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Network Equipment Technologies,
Inc. and subsidiaries at March 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1994 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
San Jose, California
April 19, 1994
<PAGE> 29
COMMON STOCK DIVIDENDS AND PRICE RANGE
DIVIDENDS
The Company has not paid cash dividends on its Common Stock, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.
MARKET PRICE
The Common Stock is traded on the New York Stock Exchange under the symbol NWK.
The following table sets forth, for the periods indicated, the range of high
and low sale prices.
<TABLE>
<CAPTION>
Fiscal 1994 High Low
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First quarter $ 9.38 $ 5.38
Second quarter 11.13 6.63
Third quarter 10.75 7.75
Fourth quarter 9.88 7.50
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1993 High Low
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First quarter $15.38 $10.50
Second quarter 12.13 9.50
Third quarter 15.00 8.88
Fourth quarter 11.50 6.00
</TABLE>
In addition, the Company's 7-1/4% Convertible Subordinated Debentures trade in
the over-the-counter market.
<PAGE> 30
CORPORATE DIRECTORY
<TABLE>
<CAPTION>
CORPORATE OFFICERS AND DIRECTORS
VICE PRESIDENTS
<S> <C>
John B. Arnold
Joseph J. Francesconi Chairman of the Board
President and Chief Executive Officer Network Equipment Technologies, Inc.
John K. Clary Robert H.B. Baldwin
Senior Vice President, Chairman and Managing General
Product Operations Partner (retired),
The Lodestar Group
Craig M. Gentner
Senior Vice President, Dixon R. Doll
Chief Financial Officer and General Partner, Accel Partners;
Corporate Secretary Chairman, The DMW Group
Raymond E. Peverell Joseph J. Francesconi
Senior Vice President, President and Chief Executive Officer
Sales and Marketing Network Equipment Technologies, Inc.
Jerry L. Davis Walter J. Gill
Vice President, Vice President and
Worldwide Client Support Chief Technical Officer
Network Equipment Technologies, Inc.
Walter J. Gill
Vice President and DuWayne J. Peterson, Jr.
Chief Technical Officer President, DuWayne Peterson Associates
David P. Owen Frank S. Vigilante
Vice President, Senior Vice President (retired), AT&T
Corporate Strategy
and Business Development Hans A. Wolf
Vice Chairman of the Board (retired),
Syntex Corporation
</TABLE>
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 10 a.m. on August 9, 1994 at
the Company's headquarters in Redwood City, California. Pursuant to the
Company's bylaws, in order for a stockholder to propose any business (including
nominations for director) at an annual meeting, the stockholder must provide 30
days advance written notice of the specific proposal to the Secretary of the
Company (no later than July 10, 1994 with respect to the August 9, 1994 annual
meeting).
INVESTOR RELATIONS
N.E.T. welcomes inquiries from its shareholders and other interested investors.
For general information about the Company, additional copies of this report,
the Form 10-K or other financial information, direct inquiries to Investor
Relations at Company headquarters, or call 415/780- 5605. For the latest
available news, call our hotline at 415/780-5NWK.
TRANSFER AGENT
First National Bank of Boston
Boston, Massachussets
INDEPENDENT AUDITORS
Deloitte & Touche
San Jose, California
<PAGE> 31
[LOGO]
N.E.T.
800 Saginaw Drive
Redwood City, CA
94063-4740
TEL. 415.366.4400
FAX 415.366.5675
TLX 172325
