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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, 1995
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)
<TABLE>
<S> <C>
DELAWARE 94-2904044
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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:
<TABLE>
<S> <C>
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, 1995 WAS $433,975,536.
THE NUMBER OF SHARES OUTSTANDING OF THE COMMON STOCK, $0.01 PAR VALUE, ON
MAY 31, 1995 WAS 18,920,024.
DOCUMENTS INCORPORATED BY REFERENCE:
THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
MARCH 31, 1995 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 8, 1995 IS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K TO THE EXTENT STATED
HEREIN.
EXHIBIT INDEX IS LOCATED ON PAGE 17.
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PART I
ITEM 1. BUSINESS
GENERAL
Network Equipment Technologies, Inc. ("N.E.T." or "the Company") is a
leading supplier of multiservice backbone networks for information-intensive
organizations and network service providers worldwide. The Company is
headquartered in Redwood City, California, has more than 1,100 employees and has
installed 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.
For over a decade, N.E.T. has manufactured and supported products for
wide-area networks ("WANs"). Many network service providers and end-user
organizations in the world use N.E.T.(TM) solutions to provide cost-effective
and reliable digital communications services. Integrating data, voice, video and
image applications on packet- and circuit-switching platforms, N.E.T. products
support a wide range of technologies for LAN internetworking and WAN
communications. Designed for reliability, flexibility and compliance with
national and international standards, N.E.T. products are backed by an extensive
service and support infrastructure.
INDUSTRY BACKGROUND
In the early 1980s there were 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 and availability of high-capacity leased digital
transmission lines, referred to as "circuits". Many countries have since
experienced similar changes in their telecommunications environment.
Reliable transmission of voice and data traffic is of great importance to
major businesses and government agencies. For many of these organizations, loss
of applications capability due to failed communications networks could result in
a significant loss of revenue or failure of a critical mission. By the mid
1980s, some of these organizations began to move their high-volume, critical
applications away from public networks and application-specific networks and
onto integrated private networks. Such WANs, or backbone networks, constructed
around fully-dedicated circuits to achieve greater reliability and cost savings,
quickly became critical to the success of these enterprises.
These developments encouraged the growth of the enterprise -- or
private -- network segment of the WAN market. Products, often referred to as
"bandwidth managers", became available to manage the increasing amounts of
bandwidth. The enterprise network segment grew rapidly during the mid to late
1980s, and generally refers to communications solutions whereby equipment is
owned and managed by enterprises and is located on their premises.
During the early 1990s, with the increasing availability of high-bandwidth
switched digital services such as Integrated Services Digital Network ("ISDN")
and frame relay, demand grew for enterprise network platforms to manage switched
services in conjunction with enterprise networks -- referred to as providing
"bandwidth-on-demand". The availability of these advanced carrier services,
along with Virtual Private Networks for voice and Managed Data Networks for
data, has blurred the line between public and private networks, making hybrid
networking (a mix of public and private solutions) more common.
In response to the expanding requirements for bandwidth managers to support
multiple technologies, application types, and services on a single
communications platform, multiservice platforms have been developed. Such
platforms enable the construction of multiservice backbone networks.
Multiservice backbone networks enable users to avoid being restricted or
"locked-in" to a single technology or type of application. Multiservice
platforms provide flexibility that enables the customization of a network to
meet current needs and allows the addition of technologies and applications in
the future.
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The public network segment of the WAN market includes equipment owned, and
services provided, by carriers. Public network equipment is generally located on
carriers' premises (such as central offices) and is used to offer a wide variety
of services, ranging from traditional telephone services to sophisticated value-
added services for businesses using high-speed digital switching and
transmission technology. There is a trend towards greater use of carrier
offerings by enterprises and, as a result, equipment demand is shifting from
that of pure enterprise network equipment, as described above, to public network
equipment which also supports enterprise network requirements. In general, the
branch or department within the carrier organizations that is responsible for
the provision of network services to businesses is referred to as a network
service provider. Network service providers focus on the provision of advanced
business services and are increasingly involved in data networking -- as opposed
to the traditional carrier organization that provides telephone services to the
general public and is more concerned with voice provisioning, and also sells
communications equipment and transmission bandwidth (by leasing dedicated lines)
to businesses.
In addition, there exists an increasing demand on the part of customers for
"outsourcing" portions of their enterprise networks. This means they are asking
carriers, systems integrators, or outsourcers to take ownership of and to manage
communications equipment and services that provide the benefits of traditional
private networks while shifting the responsibilities associated with daily
network operations. Carriers, or more specifically their outsourcing or network
service provisioning groups, may also be involved in the selection, procurement
and provisioning of the transmission services required for such networks. As a
result, network service providers 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.
Within the public and enterprise network solutions markets, there is
further segmentation that accounts for variations in opportunities on a regional
and capacity-related basis. For example, the increasing "internationalization"
or "globalization" of businesses and an increasing liberalization of carrier
services around the world have propelled the industry toward a worldwide focus
requiring products designed to meet various national and international
standards.
From a capacity-related perspective, there is a trend towards using
higher-bandwidth digital services, as high capacity optical fiber becomes the
backbone of carrier networks. This extends demand for bandwidth management
capabilities to broadband network equipment. At the same time, and at the other
end of the scale, the benefits which have been realized by larger, central sites
are being desired by smaller, branch sites of information-intensive
organizations. Consequently, access equipment is one of the most rapidly growing
segments of the WAN equipment market.
The proliferation of local area networks ("LANs") that interconnect
computers within an office building has created a demand for connectivity
solutions that promote communications between LANs. The connectivity of LANs,
whether locally (within a single building) or across the wide area (throughout a
geographically-dispersed enterprise), is referred to as LAN internetworking. In
the 1990s 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 accustomed to sharing data between
geographically-remote locations.
For the LAN, LAN internetworking and WAN equipment markets, Asynchronous
Transfer Mode ("ATM", a specific form of cell-relay 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 have a significant impact on the entire networking
industry.
In summary, the explosion of communications technology and capacity,
creative utilization of that technology by competitors and users, increasingly
assertive participation of carriers in the business communications market, and
significant growth in international markets have all combined to dramatically
increase 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. During the last decade, competition has steadily increased
as the networking market has grown and the importance of networking to
enterprises has increased. As a result, N.E.T. feels that the industry today is
more competitive than ever (see "Competition" below).
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COMPANY STRATEGY
N.E.T. currently focuses on two strategic markets in which the Company has
demonstrated success to date and believes there are continuing opportunities in
the future. The Company targets wide-area multiservice backbone networks in
information-intensive organizations and network service providers worldwide. The
Company's strategy is to focus its products, support and distribution
capabilities to address the needs of network planners, managers, and users in
both of these enterprise and carrier market segments.
The Company believes that information-intensive organizations have a wide
range of communications requirements that determine their wide-area networking
needs. The diversity of requirements is enormous and includes the following
cases along with many variations: very dense communications traffic among
relatively few key locations or "network hubs"; light communications traffic
from many locations distant from the network's hubs; and interconnection of LANs
to WANs. The Company's sales strategy includes reaching the top 1,000
communications users worldwide by employing a highly-trained direct sales force
in the U.S. and the U.K., as well as leveraging sales through additional
distribution channels worldwide. As part of the sales process, N.E.T. or
distributor personnel consult extensively with customers concerning their
network requirements. Company personnel also provide support and training to
customers and distributors of the Company's products. In addition, 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 is increasingly directing its distribution and its product
teams to reach and meet the needs of such potential customers. For existing
clients, the Company's sales strategy includes the provision of a migration path
to evolve their multiservice backbone networks to incorporate ATM technology as
appropriate in the future.
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 non-exclusive distribution
agreements with a number of partners, outlined under "Marketing and
Distribution" below.
To address the needs of network planners, managers, and users in both the
enterprise and carrier market segments, the Company's product strategy is to
provide sophisticated transmission, network management and connectivity
platforms as wide-area network solutions. N.E.T.'s core multiservice platform
and frame-relay product lines provide solutions designed to optimize use of T1,
E1, T3, and E3 transmission elements of the network. Its access and low-end
networking products provide cost-effective connectivity from smaller locations
with lighter traffic requirements, and its broadband switch family provides
transmission management solutions targeted at T1, fractional T3, T3, and OC-3
traffic for major enterprises and cellular network providers. N.E.T.'s
internetworking products enhance connectivity and interoperability among devices
that transmit information between LANs across WANs. Interwoven into many aspects
of this product strategy is the migration to, and incorporation of, ATM
technology and support for ATM carrier services. With all of its communications
products, the Company develops and supports network management products to
enhance operator visibility into network conditions, permitting greater control
and management of networks.
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,
and will continue to do so as deemed appropriate by management. A recent example
of the Company's strategy to complement its platforms offerings from other
vendors is the strategic partnership with Cascade Communications Corporation
("Cascade"). This includes joint marketing and distribution of Cascade's
frame-relay switches with N.E.T.'s families of frame-relay products and
multiservice platforms. Through this agreement, N.E.T. can offer customers an
extended range of frame-relay products backed by N.E.T. service.
N.E.T.'s service strategy is to provide superior support for its own
products described above, as well as for products from other vendors, such as
Cascade, when appropriate. The Company provides a wide range of service and
support options for all of its products including installation, a choice of
different hardware and software maintenance programs, upgrades and repairs,
technical assistance (performed over the telephone or by dialing into clients'
networks), and training for many categories of network staff. Also, N.E.T. has
performed a significant amount of systems integration business recently, and its
strategy includes leveraging the experience gained to extend this aspect of its
service business.
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The Company's service strategy includes supporting its customers among the
top 1,000 communications users worldwide by employing a trained N.E.T. service
and support organization in the U.S. and the U.K., as well as leveraging service
and support capabilities of authorized service agents, many of whom are also
authorized to sell N.E.T.'s products, around the world. In addition, the Company
is developing appropriate service and support capabilities via third-party
agreements to address the requirements of organizations beyond the top 1,000
users.
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 network 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 Distribution" below).
PRODUCTS
The Company maintains an engineering and manufacturing organization that is
responsible for all of the Company's products. The main product lines include
IDNX(R) multiservice platforms, FrameXpress(TM) frame-relay nodes, SONET
Transmission Manager(TM) (STM(TM)) broadband switches, and NetOpen(TM) network
management systems, all of which are described below. Access and low-end
networking products are provided within multiservice and frame-relay product
lines as well as N.E.T.'s SPX(TM) and ADNX(R) product families. In addition, the
Company is developing ATM products for the WAN that will interoperate with and
become members of the multiservice product family. Information regarding
N.E.T.'s ATM in the WAN architecture will be made available later this year.
N.E.T.'s multiservice, frame-relay and broadband networks are designed to
take advantage of distributed network intelligence. This means that all
platforms are equipped with a high degree of intelligence that enables each node
to communicate with other family members, make decisions and take appropriate
action regarding the state of the network and applications being supported on it
without reference to any external network controlling processor. In this way,
networks can be designed to prevent a single point of failure (such as could
occur at the workstation of an external network controlling processor) and can
benefit from rapid response times provided by the nodes' up-to-date network
knowledge and local nodal processing.
All N.E.T. networking nodes perform multiplexing and routing (including
automatic re-routing) and all have sophisticated network intelligence.
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. Rapid re-routing is the ability to dynamically route
existing network traffic around a failed circuit fast enough to keep the
end-to-end connection intact. Network intelligence 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. Such intelligent nodes can
pass information about the network to N.E.T.'s network management systems that
are based on industry-standard workstations and provide further storage and
processing capacity to enable the display and analysis of conditions and
parameters within the network.
The IDNX multiservice platform family allows users of voice, data, image
and video communications to achieve full potential from wide-area networks in a
highly cost-effective manner. This family incorporates packet- and
circuit-switching designed to manage both traffic types in the most efficient
way. N.E.T.'s multiservice platforms offer a wide range of interfaces to
customers' equipment (e.g., Ethernet LANs, Token Ring LANs, frame-relay access
devices or "FRADs", computers, private branch exchanges or "PBXs", and video
devices) while supporting different types of applications and carrier services.
These platforms support T1, E1, T3, and E3 transmission speeds and the family
includes devices for low-end networking and WAN access. The Company's
multiservice backbone networks can be configured and automatically reconfigured
in a wide variety of complex network topologies including point-to-point, ring,
star and fully interconnected mesh to accommodate clients' evolving
requirements. Unlike most time division multiplexing bandwidth managers,
N.E.T.'s multiservice platforms 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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Integral to these multiservice platforms is N.E.T.'s Packet Exchange ("PX")
family that provides support for internetworking activities and switched
services. There are three main product types:
- - LAN/WAN Exchange(TM) ("LWX") router module provides multiprotocol routing with
concurrent bridging support to interconnect geographically dispersed LANs over a
WAN. It is compatible with Cisco Systems, Inc. routers and supports connections
to local Ethernet or Token Ring interfaces, as well as to remote LWX modules,
standalone routers, packet-switching services or IBM controllers;
- - Frame Relay Exchange(TM) ("FRX") is a frame-relay switching node and access
device that can provide frame-relay access to bridges, routers (including the
LWX), front-end processors, or other devices that support the frame-relay DTE
interface. 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. It can also connect to
public frame-relay networks;
- - ISDN Exchange(TM) ("ISDNX(TM)") server module supports Integrated Service
Digital Network ("ISDN") circuit switching and routing capabilities and enables
a variety of devices such as PBXs, video codecs, routers, and front-end
processors to connect to the IDNX platform via an industry-standard Primary Rate
Interface ("PRI"). The signaling capabilities of the ISDNX provide an
intelligent connection and offer ISDN services to the attached ISDN device.
The FrameXpress family of scalable, standards-based products is designed to
provide frame-relay solutions ranging from high-speed backbone switching to
remote stand-alone access. The FrameXpress platform uses the same data and
internetworking modules as N.E.T.'s multiservice platform, but is designed to
address the needs of more data-intensive customers. 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. N.E.T. markets a comprehensive
frame-relay product line which combines products from other vendors, such as
Cascade and Sync Research, Inc., with the Company's own internally-developed
FrameXpress family. For very concentrated data applications, N.E.T. resells
Cascade's high-capacity B-STDX(TM) switch that provides high port-density
configurations. For smaller locations, N.E.T. markets Sync Research's
FrameNode(TM) FRAD that provides branch offices with WAN access.
The STM family of broadband network switches 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 T1, fractional T3, T3, and
OC-3 carrier services, this broadband node 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 re-route and restoration. STM broadband
networks provide effective, reliable, and flexible wide-area communications
infrastructures capable of supporting mainframe channel extension, high-speed
router, CAD/CAM, and other applications requiring high-capacity transport. Also
traffic from T1 based devices, such as videos, PBXs, routers and T1 multiplexers
can be integrated.
Other network products developed and marketed by the Company include SPX
statistical multiplexers that provide low-capacity networking for low- to
medium-volume data networks and ADNX/48 Integrated Access Multiplexers that
cost-effectively combine LAN traffic with voice, synchronous data and video over
a single T1 or fractional T1 transmission line.
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 telecommunications staff
and network, thereby increasing efficiency and reducing cost.
N.E.T. offers three main network management products for IDNX multiservice
and FrameXpress frame-relay networks:
- - NetOpen 5000 network management system is a multi-user real-time monitoring,
control and management system for the Company's multiservice platforms and
access products. The user interface presents color graphic representations of
the network topology and network elements;
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- - NetOpen/Circuit Manager gives clients the ability to software partition their
physical backbone network into multiple, independent virtual networks. This
allows a single, enterprise-wide physical network to appear to users as a group
of small independent networks, but provides greater economies of scale;
- - Expert Fault Management System ("EFMS") is a software application that uses
expert systems technology to automatically monitor multiservice backbone network
activity and to detect problems in transmission lines, multiservice platforms
and other devices 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.
FrameXpress frame-relay networks can also be managed using
industry-standard SNMP ("Simple Network Management Protocol") management
systems. Furthermore, N.E.T. offers two additional network management products
specifically for FrameXpress frame-relay networks:
- - FrameXpress Node Manager is a graphical management tool that enables network
managers to remotely review network events and make network modifications;
- - FrameXpress Accountant gathers and stores information about network usage,
enabling this data to be accessed for detailed traffic analysis activities such
as billing and capacity planning.
N.E.T. also offers the choice of two network management products for STM
broadband networks:
- - Node Operations Console ("NOC") facilitates the 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;
- - Broadband Operations System ("BOS") provides a color graphical representation
of STM nodes and network. The views provide a dynamic, graphical representation
of object states that change color to reflect alarm conditions. The graphical
views simplify frequently used network operations tasks.
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 the failure to achieve or maintain acceptance would materially
and adversely affect the Company's operating results and financial condition.
MARKETING AND DISTRIBUTION
Marketing and Distribution Strategy. As noted above, N.E.T.'s marketing
strategy focuses on enterprise and carrier organizations with extensive voice,
data, image and video communications needs. Enterprise organizations include
banks and other financial institutions, airlines, retail chains, manufacturers
and government agencies. Carrier organizations include telephone companies
around the world, value-added network suppliers and cellular network service
providers. Increasingly, the Company has been supplying its products to network
service providers and systems integrators as customers and prospects turn to
them to provide network services and management.
N.E.T. markets products by means of its own direct sales organization in
the U.S. and the U.K. and through distributors worldwide. 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. N.E.T. maintains subsidiaries which focus on sales to the U.S.
government (N.E.T. Federal, Inc.), and the European market (N.E.T. Europe Ltd.
and N.E.T. Europe SA).
The Company expects to face development and distribution challenges as it
expands its product and service offerings, introducing new technologies or
product architectures as part of the evolution of its current products and the
introduction of its next generation products. Failure to sustain acceptance of
current products and services while introducing new or enhanced products and
services would impact the Company's ability to leverage its products as they are
introduced, and could negatively affect the Company's performance.
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Sales to the U.S. Government. N.E.T.'s wholly owned subsidiary, N.E.T.
Federal, Inc., markets the Company's products and services 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
encompass varying periods, but most may be terminated by such government
agencies at their convenience or at annual intervals. In fiscal 1995, 1994, and
1993, sales, systems integration and other services to the U.S. Government
accounted for 28%, 28%, and 24%, respectively, of N.E.T.'s revenue. These
amounts include sales, which amounted to 19%, 20% and 17% of revenue for fiscal
years 1995, 1994 and 1993, 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 multiservice products and certain related products. IBM also
resells STM products in the U.S. 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. 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, 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 NetView(TM) environment.
IBM is not obligated to purchase any products under the IBM Agreement. The IBM
Agreement's initial term of five years has been extended until June 11, 1996 and
may be renewed for four 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 of N.E.T.'s products under the IBM Agreement.
In fiscal 1995, 1994, and 1993 IBM accounted for 8%, 11%, and 15%, respectively,
of N.E.T.'s revenue.
No other single customer account was responsible for ten percent or more of
revenue during fiscal 1993, 1994, or 1995.
International Sales. N.E.T. has established subsidiaries in the United
Kingdom (N.E.T. Europe Ltd.) 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 U.S. to the regions of Asia
Pacific and Latin America. International sales represented 28%, 22% and 25% of
the Company's revenue in fiscal 1995, 1994 and 1993, 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 communications products for use in private or hybrid networks in
such countries. Financial information regarding foreign operations and export
sales is discussed in the Segment Information footnote in the Notes to
Consolidated Financial Statements in the Company's 1995 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 it markets. Under
the agreement, the Company and Ericsson share a development committee to
coordinate product development. The Company also appointed certain Ericsson
affiliates as non-exclusive distributors of the Company's products. In fiscal
year 1995, sales to Ericsson and its affiliates grew substantially and Ericsson
and N.E.T. discontinued joint funding of product development.
The Company has entered into distribution and technology agreements with
many other companies, including Cascade Communications Corporation and Datacraft
Asia.
8
<PAGE> 9
The Company's relationships with network service providers further expand
the availability of N.E.T. products. These relationships include joint marketing
agreements with both AT&T, BT Concert and MCI, and a systems integration
agreement with Bell Atlantic Network Integration. The Company's products are
offered by other network service providers around the world, such as US WEST and
Southwestern Bell in the U.S., and France Telecom, Telia and Tele-Danmark in
Europe.
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. 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 16 of the Company's 1995 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 hardware and software maintenance
plans and agreements. Customers around the world can access one of N.E.T.'s
three Technical Assistance Centers, located on east and west coasts of the U.S.
and in the U.K. 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 two years
that, 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, systems integration and support offerings. Gross
margin on service and other revenue has and will continue to fluctuate as a
result of changes in mix between systems integration services and other service
revenue. 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 would be materially and adversely affected.
COMPETITION
During the past decade, the communications industry in general, including
the specific segments within which N.E.T. competes, has experienced
unprecedented growth and increasing complexity. This intensely competitive
industry is characterized by advances in technology that frequently result in
the introduction of new products and services with improved performance
characteristics. Hence, the Company focused its competitive strategy to leverage
its core competencies and targets two strategic markets: multiservice backbone
networks for information-intensive enterprises and network service providers
worldwide. However, many of the Company's current and potential competitors
possess more extensive engineering, manufacturing, and marketing capabilities in
addition to greater financial, technological, distribution 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 future revenue levels and operating results.
In both the public and enterprise communications equipment markets, N.E.T.
competes with other communications equipment vendors. High-end bandwidth
managers, which may be based on circuit-, packet-, frame-, or cell-switching,
compete directly with N.E.T.'s multiservice platforms and are available from WAN
communications equipment vendors such as Ascom Timeplex, General DataComm,
Newbridge Networks, and StrataCom.
9
<PAGE> 10
Data traffic has become an increasingly significant component of enterprise
and carrier networking. As more and more data traffic originates on LANs,
dedicated single-service solutions (using internetworking or frame-relay
technologies) have become an alternative to the Company's multiservice
solutions. Thus, N.E.T.'s frame-relay product line has been developed to address
the special needs of this market segment. Within this data-networking market
segment, the Company competes with router vendors such as Cisco Systems and Bay
Networks with respect to internetworking solutions, and competes with other
digital communications equipment vendors such as StrataCom and Cascade
Communications with respect to frame-relay implementations. The increasing
importance of frame relay for WAN data transport is reflected in the growing
number of subscribers to frame-relay services. N.E.T. provides solutions which
allow enterprises or network service providers to build frame-relay networks
that are compatible with carrier service offerings and enable users to take
advantage of public services to consolidate LAN and legacy data into, and along
with, frame-relay traffic. The Company has strengthened its position in the
frame-relay market recently through its strategic partnership with Cascade (see
Company Strategy and Products sections above).
As the market for products implementing ATM technology evolves it is
expected that the Company's ATM WAN product line, currently under development,
will face significant competition. N.E.T. plans to introduce networking
solutions that will enable the construction of enterprise- or carrier-owned
networks that will comply with, and enable customers to leverage the benefits
of, public ATM services. In the WAN segment of the ATM marketplace, the Company
expects to continue its historic competition with WAN communications equipment
vendors such as General DataComm and Newbridge Networks as well as Cascade
Communications and StrataCom. Although there are numerous companies offering ATM
LAN products, the Company does not expect to compete directly with the majority
of these companies. For example, N.E.T. does not expect to compete directly with
intelligent hub vendors such as 3Com, Cabletron Systems, IBM/Chipcom, Bay
Networks, and Ungermann-Bass, nor with the router vendors such as Cisco Systems
and Bay Networks in their historical markets. However, N.E.T. does expect to
compete with these companies, in addition to other ATM LAN switch vendors such
as Fore Systems and Whittaker, to the extent their offerings address the same
markets as the Company's products and services.
N.E.T. addresses the low-end networking and network access markets with
cost-effective devices within the Company's multiservice and frame-relay product
lines in addition to product families dedicated to the needs of branch offices.
A large number of companies have products addressing the requirements of the
rapidly growing network access segment that focuses on branch-office
connectivity. Now internetworking vendors, intelligent hub manufacturers and WAN
communications equipment suppliers may be seen joining the traditional suppliers
of access devices to compete for sales of integrated access products.
The Company's broadband products face competition from makers of equipment
designed for high-capacity networks such as Ascom Timeplex, Newbridge Networks,
T3plus Networking, and Tellabs.
Since enterprise WANs 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.'s solutions
compete with those of the carriers. Most of these carriers enjoy substantially
greater marketing resources and customer recognition than N.E.T. 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. for enterprise WANs.
Although carriers, systems integrators and outsourcers offer alternative
solutions to enterprise backbone networks, N.E.T. also markets its products to
these suppliers. The Company provides communications equipment that is used by
such suppliers to construct WAN backbones from which they can offer advanced
services. For example, a growing number of carriers are joining forces to
provide Value-Added Network ("VAN") services, and a number of the VAN service
providers (such as AT&T Business Communications Services, BT Concert, Eunetcom,
Infonet Services, and Sprint International) are N.E.T. customers. Therefore, the
Company believes that it is in a position to provide equipment to VANs. In
addition, some systems integrators such as EDS and Perot Systems and outsourcers
such as Advantis (a subsidiary of IBM and Sears) and BT Concert also use N.E.T.
equipment to facilitate their business offerings.
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.
N.E.T.'s operating results could be adversely affected if IBM announced the
availability of such products. IBM also offers maintenance agreements for
products it distributes, which compete with those of the Company.
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<PAGE> 11
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. 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
multiservice platforms and other communications products or services, which
would have a material adverse affect on the Company's operating results and
financial condition.
MANUFACTURING
N.E.T. manufactures its products from components and assemblies designed to
meet the Company's quality and reliability requirements. The Company also
resells certain complementary products that 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 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. Certain relatively simple fabrication,
assembly, and test processes are performed by subcontractors in the United
States and East Asia; final assembly and testing of N.E.T. products are
performed at the Company's Redwood City, California facilities. Availability
limitations, price increases or business interruptions could adversely impact
the Company's revenue, margins or earnings.
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, in addition to process improvement throughout the Company.
This includes activities to improve the quality of supplied components,
subassemblies and internal processes. The Company has completed the ISO 9000
International Quality System certification process for its operations worldwide.
N.E.T. is certified to ISO 9001, which covers quality standards for design and
development, production, installation, and servicing. In addition, N.E.T. has
received TickIT certification for complying with quality standards for software
development.
The Company has entered into software escrow arrangements and has granted
to certain customers manufacturing rights that 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. If large orders do not close when forecasted,
near term demand for products weakens or the Company experiences significant
delivery schedule changes, its operating results would be adversely affected.
Because of this and other factors, including the Company's generally short
delivery cycle, 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, providing multiservice platforms for information-intensive enterprises
and network service providers worldwide. Product priorities include those
intended to enable N.E.T. to occupy a competitive 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.
Management believes that product and technology leadership are keys to
long-term success in an industry and market that evolves as rapidly as
networking does today. N.E.T. believes that its future operating results will
depend on its ability to continue to enhance existing products as well as to
develop and timely bring to
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<PAGE> 12
market new products or products acquired from third parties 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 available,
recently announced or planned products will be successful.
Research and development expense increased by $0.2 million (0.6%) in fiscal
year 1995 to a total of $33.9 million, from $33.7 million in fiscal year 1994
and $32.2 million in fiscal year 1993. In addition, $2.0 million, $2.7 million
and $3.4 million in fiscal 1995, 1994 and 1993, 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 1995 Annual Report. R&D expense as a percentage of revenue
decreased from 14.2% of revenue in fiscal year 1994 to 12.0% of revenue in
fiscal year 1995. Management plans to continue funding research and development
efforts at levels necessary to advance product programs. While it is
management's intention to continue to focus these development efforts, research
and development spending is expected to increase in fiscal 1996 while decreasing
as a percentage of planned revenue.
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 U.S. 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 been
passed by the United States Senate. N.E.T. is unable to predict the outcome or
the timing of any final action on this subject. If any such proposal is adopted,
N.E.T. could be materially and adversely affected by direct competition with the
RBOCs.
In addition, N.E.T. customers usually obtain network services 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 U.S., 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 enterprise 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 exists a telecom authority which requires 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 enterprise
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 the
disconnection of installed equipment 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 U.S. Government are subject to
compliance with applicable regulations (e.g., Federal Acquisition Regulations).
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PATENTS AND LICENSES
N.E.T. has obtained patents on inventions relating to its products and has
applied for others. Issued patents in the U.S. expire on dates ranging from
December 7, 2004 to March 6, 2012 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 was capitalized and
amortized over the life of the agreement, and made additional payments that were
not material. The agreement expired in March 1995.
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
could be adversely affected.
EMPLOYEES
As of March 31, 1995, the Company had 1,189 employees. Of the Company's
total employees, 149 were in Finance and Administration, 218 were in Engineering
and Research and Development, 221 were in Field Service and Training, 133 were
in Marketing, 310 were in Sales and 158 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 287,000 square feet of office, research and
development, and manufacturing space in a modern industrial park in Redwood
City, California, which is leased until October 1998. N.E.T. also leases sales
and service offices at other locations in the United States, France, Germany,
Norway, Uruguay and the United Kingdom. The Company believes that its facilities
are, in all material respects, suitable, and adequate for its anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings pending or
threatened against it at this time. The Company's federal income tax returns for
certain prior years are under examination by the Internal Revenue Service
("IRS"). The IRS has proposed certain adjustments which related substantially to
the timing (years) of tax deductions. The Company does not agree with the IRS
position on these matters and is contesting the proposed adjustments through the
IRS appeals process. In the opinion of management, any adjustments that may
result from the ultimate resolution of these matters will not have a material
affect on the Company's financial condition or results of operations.
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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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages at June 1, 1995, are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- ----------------------------------------------------
<S> <C> <C>
Roger A. Barney 55 Vice President, Human Resources and
Corporate Services
Jerry L. Davis 47 Vice President, Client Support
J. Robert Forkish 42 Vice President and Chief Technology Officer
Joseph J. Francesconi 52 President, Chief Executive Officer, and Director
Craig M. Gentner 48 Senior Vice President, Chief Financial Officer and
Corporate Secretary
David P. Owen 54 Vice President, Corporate Development and
Business Strategy
Raymond E. Peverell 47 Senior Vice President, Sales and Marketing
G. Michael Schumacher 56 Senior Vice President, Engineering
Charles S. Shiverick 51 Vice President, Operations
</TABLE>
Roger A. Barney joined the Company in October 1987 as Vice President of
Human Resources, and in 1992 became Vice President of Human Resources and
Corporate Services. Prior to joining the Company, Mr. Barney held numerous
management positions, including Director of Human Resources for Verbatim
Corporation. He also founded his own management consulting business, which he
ran from 1983 to 1987.
Jerry L. Davis joined the Company in January 1984 as the Director of
Quality and Service. In 1989 he was appointed Vice President of Quality and
Service, and in 1990 as Vice President and General Manager of Worldwide Client
Support. Prior to that time, Mr. Davis was the National Service Manager for
International Remote Imaging Systems where he developed their service
operations. He also spent 12 years with G.D. Searle as a Regional Service
Manager.
J. Robert Forkish is one of the founders of the Company, and from 1983 to
1991 was the principal software architect for the company's IDNX product line
and Vice President of Strategic Marketing. From 1991 to 1994, Mr. Forkish worked
as an independent networking consultant for numerous companies. He rejoined the
Company in May of 1994, and today serves as the Company's Vice President and
Chief Technology Officer.
Joseph J. Francesconi has served as a Director and as President and Chief
Executive Officer since 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.
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<PAGE> 15
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.
David P. Owen joined the Company in April 1990 as Senior Technology
Analyst, and in 1994 became Vice President of Corporate Development and
Strategy. Prior to joining the Company, Mr. Owen was Director of Product
Marketing at StrataCom. In 1983, he founded the fast packet development
organization at Packet Technologies, StrataCom's predecessor company, and is a
co-holder of several fast packet patents. Prior to that Mr. Owen spent 15 years
at Control Data in a variety of product strategy, architecture and software
development positions.
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.
G. Michael Schumacher, Senior Vice President of Engineering, joined the
Company in January 1995. Prior to joining the Company, Mr. Schumacher was Vice
President and General Manager of the UNIX Systems Division of Unisys Corporation
from 1993 to 1994. He also served at Mentor Graphics as General Manager of
front-end CAE Tools from 1991 to 1993, and at Solbourne Computers as the Vice
President of Engineering from 1989 through 1990.
Charles S. Shiverick, Vice President of Operations, joined the Company in
March 1993 as Senior Director of Corporate Quality. Since 1989 Mr. Shiverick
held various senior management positions with ADAPTIVE Corporation, a former
subsidiary of the Company, most recently as Vice President, Business Development
and Quality. Mr. Shiverick spent 22 years at IBM Corporation in a variety of
management positions.
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 1995 Annual Report to Stockholders ("Annual Report") and is
incorporated herein by reference. At March 31, 1995, there were 735 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 12 of the Registrant's 1995
Annual Report and is incorporated herein by reference.
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 13 through 17 of the
Registrant's 1995 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 Financial Summary"
at page 12 of the Registrant's 1995 Annual Report and the consolidated financial
statements and independent auditor's report thereon at pages 18 to 31 of the
Registrant's 1995 Annual Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information 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 covered by this Report, 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: Board Committees, Meetings, and 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" 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 Schedule at page 20 of this Report.
(2) Financial Statement Schedule -- See Index to Financial Statements
and Financial Statement Schedule at page 20 of this Report.
(3) Exhibits -- See Exhibit Index at page 17 of this Report.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended March 31, 1995.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE
- ------------ ----------------------------------------------------------------- ------
<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 n. 4
Guaranty Trust Company of New York.
4.2 Rights Agreement dated as of August 15, 1989, between Registrant n. 6
and The First National Bank of Boston, as amended.
4.3 Certificate of Designations of Series A Junior Participating n. 5
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.)
10.1 Agreement dated June 11, 1987, between Registrant and n. 1
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.)
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement, dated n. 2
August 12, 1987, between Registrant and Lincoln Property N.C.,
Inc.
10.7 Employment Agreement dated March 9, 1994, between Registrant and n. 10
Joseph J. Francesconi.*
10.8 Employment Agreement dated February 24, 1995, between Registrant
and John K. Clary.*
10.9 Employment Agreement dated February 23, 1994, between Registrant n. 10
and Craig M. Gentner.*
11.1 Statement Regarding Computation of Per Share Income.
13.1 1995 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.
27.1 Financial Data Schedule
99.1 Registrant's 1983 Stock Option Plan.* n. 8
99.2 Registrant's 1988 Restricted Stock Award Plan.* n. 7
99.3 Rules of 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>
17
<PAGE> 18
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 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 S-8 (Nos. 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.
(10) Incorporated by reference from the similarly numbered Exhibit previously
filed as an Exhibit to Registrant's Annual Report on Form 10-K (No.
0-15323) filed with the Securities and Exchange Commission on June 27,
1994.
* A management contract or compensatory plan required to be filed as an Exhibit
to Form 10-K.
18
<PAGE> 19
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 21, 1995 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 June 21, 1995
- ------------------------------------- Officer and Director
Joseph J. Francesconi (Principal Executive Officer)
/s/ John B. Arnold Chairman of the Board June 21, 1995
- -------------------------------------
John B. Arnold
/s/ Robert H.B. Baldwin Director June 21, 1995
- -------------------------------------
Robert H.B. Baldwin
/s/ Dixon R. Doll Director June 21, 1995
- -------------------------------------
Dixon R. Doll
/s/ Craig M. Gentner Senior Vice President, Chief June 21, 1995
- ------------------------------------- Financial Officer and Corporate
Craig M. Gentner Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Walter J. Gill Director June 21, 1995
- -------------------------------------
Walter J. Gill
/s/ Frank S. Vigilante Director June 21, 1995
- -------------------------------------
Frank S. Vigilante
/s/ Hans A. Wolf Director June 21, 1995
- -------------------------------------
Hans A. Wolf
</TABLE>
19
<PAGE> 20
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet as of March 31, 1995 and 1994 *
Consolidated Statement of Operations for the years ended
March 31, 1995, 1994 and 1993 *
Consolidated Statement of Cash Flows for the years ended
March 31, 1995, 1994 and 1993 *
Consolidated Statement of Stockholders' Equity for the years ended
March 31, 1995, 1994 and 1993 *
Notes to Consolidated Financial Statements *
Independent Auditors' Report *
</TABLE>
*Incorporated herein by reference from information contained on pages 18 through
31 of the Registrant's 1995 Annual Report to Stockholders.
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report 21
Schedule II - Valuation and Qualifying Accounts S-1
</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, 1995.
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
NETWORK EQUIPMENT TECHNOLOGIES, INC.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1995 and 1994, and for each
of the three years in the period ended March 31, 1995, and have issued our
report thereon dated April 19, 1995; such financial statements and report are
included in your 1995 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedule of
Network Equipment Technologies, Inc. listed in the accompanying index to
financial statements and financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
April 19, 1995
21
<PAGE> 22
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
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, 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
For the year ended
March 31, 1995:
Accounts receivable
allowances......................... $3,195 -- $1,762(1) $ (2,443) $ 2,514
</TABLE>
- ---------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
S-1
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AND CONSULTING AGREEMENT AND RELEASE OF ALL CLAIMS
I, John Clary, on behalf of myself, my representatives, heirs, executors,
administrators, successors, and assigns, (hereinafter collectively referred to
as "I/me"), and NETWORK EQUIPMENT TECHNOLOGIES, INC., its affiliated and
subsidiary entities, and the officers, directors, agents, employees, attorneys,
successors, and assigns of all of them (hereinafter collectively referred to as
"N.E.T."), agree as follows:
1. I am currently employed by N.E.T. as Senior Vice President Product
Operations and Re-Engineering in its Redwood City, California office.
2. I and N.E.T. wish to preserve the good will that exists between them,
establishing an employment/consulting relationship for a maximum term.
3. I have concluded that continuation of my employment as a regular full-time
employee with N.E.T. is not in my best interest and I elect to resign as Senior
Vice President and as a Corporate and Section 16b Officer effective February
24, 1995. I desire and N.E.T. has agreed that I shall remain a regular
full-time employee of N.E.T. until May 12, 1995, during which time I shall
complete focal reviews for persons who have reported to me during Fiscal Year
1995 and work as necessary to complete projects assigned to me (but after
February 24 I shall no longer have any duties as a Corporate officer). I shall
use all of my accrued vacation prior to May 12, 1995. I elect to resign as an
employee on May 12, 1995 ("ending date"). Between the ending date and June 30,
1995 N.E.T. and I have agreed that I shall work as a consultant to N.E.T. for
up to ten (10) hours per month for no incremental salary or cash compensation.
4. N.E.T. will pay to me the gross sum of $6,923.08 per bi-weekly pay period
between now and May 12, 1995. I shall be entitled to receive a Bonus Payout
for Fiscal Year 1995 based on an individual performance factor of 1.0 and such
Bonus Payout shall be made at the same time that similar payments are made to
other N.E.T. employees. Until May 30, 1995, N.E.T. shall continue to provide
to me the standard CHOICES benefits--medical, dental, disability and life
insurances to the extent made available to regular employees of N.E.T. All
accrued vacation time shall be used by me prior to the May 12, 1995. N.E.T.
shall upon my request take all actions reasonably necessary and consistent with
applicable law to provide me with continuing benefit coverage pursuant to COBRA
after May 30, 1995. N.E.T. shall provide me with outplacement services,
subject to limits, conditions and amounts as prescribed solely by N.E.T. My
stock options will continue to vest while I am an employee or consultant and
any options vested at the end of my employment/consulting may be exercised up
to three months after June 30, 1995 (the last day of such
employment/consulting) subject to the N.E.T. Stock Option Agreements concerning
such options. Reasonable steps will be taken by N.E.T. to assure that my
telephone extension will remain active to voice mail until the June 30, 1995.
I agree to promptly advise N.E.T. in the event that this voice mail benefit is
no longer needed by me. Except as set forth above, all other benefits
terminate as of the May 12, 1995 and I expressly waive any and all rights to
subsequent accrual or use of vacation pay, sick leave, entitlement to bonus or
equity participation or other consideration or compensation. Notwithstanding
any other provisions in the Agreement, N.E.T. retains the right to cease
providing compensation, stock option vesting and/or employee benefits coverage
under this Agreement in the event of a material breach of this agreement by me
or a termination of the employer/employee or consulting relationship by N.E.T.
for good cause (e.g., unavailability for service (due to other than
disability), misconduct, dishonesty, repeated neglect, persistent or serious
deficiencies in performance, material breach this Agreement or other
obligations or duties imposed by law).
5. For and in consideration of the obligations of N.E.T. incurred in Section 4
of this General Release Of All Claims, Covenant Not To Sue And Confidentiality
Agreement (hereinafter "Release"), I hereby acknowledge and agree that my
employment relationship with N.E.T. shall terminate no later than the ending
date and that thereafter I shall have no continuing employment (or consulting)
relationship with N.E.T. I hereby completely release and forever discharge
N.E.T. from all claims, rights, demands, actions, obligations, liabilities,
debts and causes of action of any and every kind, nature and character
whatsoever, known or unknown, which I may now have or have ever had against
N.E.T. (hereinafter, "all claims"), including without limitation all claims
arising from or in any way connected with my employment by N.E.T. or the
termination of that employment, whether based in tort or contract (express or
implied), or on any federal, state, or local law, statute, or regulation, and
all claims I may have filed or
N.E.T. Confidential - 1 -
<PAGE> 2
caused to be filed in any court of law or before any state or federal
administrative agency before the execution of this Release.
6. I understand and agree that in consideration of the foregoing I am waiving
any rights I may have had, now have, or in the future may have to pursue any
and all remedies available to me under any employment-related cause of action
against N.E.T., including without limitation, claims of wrongful discharge,
emotional distress, defamation, breach of contract, breach of the covenant of
good faith and fair dealing, vacation pay after the ending date, violation of
the provisions of the California Labor Code and any claims under Title VII of
the Civil Rights Act of 1964, as amended, the California Constitution, the
Equal Pay Act of 1963, the Civil Rights Act of 1866, the Employee Retirement
Income Security Act, and any other laws and regulations relating to employment.
I agree and acknowledge that I am waiving and releasing any rights I may have
under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"),
and that this waiver and release is knowing and voluntary. I and the Company
agree that this waiver and release does not apply to any rights or claims that
may arise under ADEA after the ending date. I acknowledge that the
consideration given for this waiver and release is in addition to anything of
value to which I was already entitled. I fully acknowledge that I have been
advised that (a) I should consult with an attorney prior to executing this
Release Agreement; (b) I have had at least twenty- one (21) days within which
to consider this Release Agreement; (c) I have at least seven (7) days
following the execution of this Release Agreement by the parties to revoke the
Release Agreement; and (d) this Release Agreement shall not be effective until
the revocation period has expired. In the event of revocation, N.E.T. has the
right to terminate this Agreement and/or my employment as if this Agreement had
never been executed.
7. I understand and agree that this is a full and final release covering all
known, unknown and unanticipated injuries, debt, claims, or damages to me which
have arisen or may have arisen in connection with my employment with N.E.T., as
well as those injuries, debts, claims or damages not now known or disclosed
which may arise from my employment, as specifically described above. I
understand that Section 1542 of the California Civil Code, provides as follows:
A general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor.
The provisions of Section 1542 of the California Civil Code and any analogous
state or federal law, if in any way applicable, are hereby waived by me. I
specifically affirm my intention to release not only those claims I know about
but also those claims against N.E.T. that I may not know about.
N.E.T. Confidential - 2 -
<PAGE> 3
8. I agree that I will not initiate or cause to be initiated against N.E.T. any
compliance review, suit, action, investigation, or proceeding of any kind, or
participate in same, individually or as a representative or member of a class,
whether under any contract (express or implied) or otherwise, or under any law
or regulation, whether federal, state, or local, pertaining in any way to any
matter herein released, unless I am required to do so by law. I further agree
that I have no right to future employment with N.E.T. and that N.E.T. will have
no obligation to re-employ me at any time.
9. I will maintain both the fact and terms of this Release and any
consideration that I receive in strict confidence, and will not disclose the
fact of this Release or any of its terms, including the fact or amount of any
payment to any other person or entity (other than my attorney in this matter
solely for use in providing counsel to me in this matter) for any reason, at
any time, without the prior written consent of N.E.T., unless required by law.
N.E.T. agrees to maintain the fact and terms of this Release, and payments
under this Release in confidence, except for those agents, employees and
representatives of N.E.T. with a need to know and except as required by law or
SEC regulation. I understand and agree that this confidentiality provision is
an essential and material term of this Release and I agree that if I violate
this provision, N.E.T. will be relieved of any obligation to make future
payments to me under this agreement and that N.E.T. will be entitled, without
limitation, to pursue legal and equitable remedies for such violation.
10. I represent and warrant that as of June 30, 1995 I will return to N.E.T.
in good condition, reasonable wear and tear excepted (a) any N.E.T. records,
documents, data, specifications, drawings, blueprints, reproductions, sketches,
notes, reports, proposals, or copies of the foregoing, or other documents or
material, or (b) any equipment or other property belonging to N.E.T. or any of
its subsidiaries or employees except the following: Cellular phone in my car
and Macintosh Powerbook (Model 170, N.E.T. Asset Tag CP- ApplePC-93-05), title
to which is hereby transferred to me by N.E.T. N.E.T. also hereby transfers to
me all rights and interest it has to software acquired from third parties and
currently loaded on the Powerbook.
11. I represent and warrant that I have complied with and will continue to
comply with all terms of the N.E.T. Employee Proprietary or Confidential
Information and Inventions Agreement signed by me, including, without
limitation, refraining from soliciting N.E.T. employees; reporting to N.E.T.
any inventions (as defined therein) conceived or made by me; and preserving as
confidential all trade secrets, confidential information, knowledge, data or
other confidential information relating to products, processes, know-how,
designs, formulas, test data, customer lists, customer information, employees,
the abilities of employees or other confidential subject matter pertaining to
any business of N.E.T. or any of its clients, customers, licensees or
affiliates. Notwithstanding any other provision herein, nothing in this
Agreement shall affect the rights or obligations of the parties under their
Stock Option Agreements or their Indemnification Agreement
12. I understand and agree that the furnishing of the consideration for this
Release will not be deemed or construed at any time or for any purpose as an
admission of liability or wrongdoing by N.E.T. Liability for any and all
claims is expressly denied by N.E.T. I further understand and agree that the
each of the releases, waivers and other provisions of Sections 5 through 11 and
the covenants contained in Sections 14 and 15 are material inducements to
N.E.T. for entering into this Release and that, for the breach of any of them
N.E.T. will be entitled to pursue legal and equitable remedies, including,
without limitation, the right to seek and obtain restitution and injunctive
relief.
13. This Release shall be deemed to have been entered into in the State of
California by residents of that state and shall be construed and enforced in
accordance with and governed by the laws of that state. Should any part, term,
or provision of be declared or determined by any court to be illegal or
invalid, the validity of the remaining parts, terms, or provisions will not be
affected thereby and said illegal or invalid part, term, or provision will be
deemed not to be a part of this Release.
14. N.E.T. and I will fully cooperate in any internal N.E.T. or external
investigations or litigation concerning or relating to N.E.T. and any of
N.E.T.'s or my activities during the time that I was employed by N.E.T. N.E.T.
and I will promptly advise the other of any formal or informal requests for
information or cooperation that may concern or relate to the interests of the
other in connection with any such investigation or litigation. Without the
written consent of N.E.T., prior to January 1, 1996 I will not become employed
by nor be a consultant to any person or company that I know or reasonably
should have known at the time of commencing such relationship competes directly
with products or services marketed by N.E.T.
N.E.T. Confidential - 3 -
<PAGE> 4
15. I acknowledge that I have been given the opportunity to consult counsel of
my own choice before signing this Release, that I am fully aware of the
contents of this Release and of its legal effect, that the preceding paragraphs
recite the sole consideration for this Release, that all agreements and
understandings between N.E.T. and me are embodied and expressed herein, and
that I enter into this Release freely, without coercion, and based on my own
judgment and not in reliance upon any representations or promises made by
N.E.T. or anyone, other than those contained herein. Except as expressly
provided herein, this Release shall supersede and render null and void any and
all prior agreements between the parties.
Date: February 24, 1995 ----------------------------------
John Clary
Network Equipment Technologies, Inc.
Date: February 24, 1995 By:
------------------------------
Its:
------------------------------
N.E.T. Confidential - 4 -
<PAGE> 1
EXHIBIT 11.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Primary 1993 1994 1995
- ------------------------------------------------------------- -------- ------- -------
<S> <C> <C> <C>
Earnings:
Net income (loss)....................................... $(11,097) $(6,324) $27,070
======== ======= =======
Shares:
Weighted average number of common shares outstanding.... 15,721 16,778 17,735
Number of common equivalent shares assuming exercise
of stock options...................................... -- -- 1,033
-------- ------- -------
15,721 16,778 18,768
======== ======= =======
Primary income (loss) per share............................ $ (.71) $ (.38) $ 1.44
======== ======= =======
Fully Diluted
Earnings:
Net income (loss)....................................... $(11,097) $(6,324) $27,070
======== ======= =======
Shares:
Weighted average number of common shares outstanding.... 15,721 16,778 17,735
Number of common equivalent shares assuming exercise
of stock options...................................... -- -- 2,059
Number of common equivalent shares assuming conversion
of convertible securities (1)......................... -- -- --
-------- ------- -------
15,721 16,778 19,794
======== ======= =======
Fully diluted income (loss) per share...................... $ (.71) $ (.38) $ 1.37
======== ======= =======
</TABLE>
- ---------------
(1) The assumed exercise of these common stock equivalents were excluded as they
were anti-dilutive.
<PAGE> 1
EXHIBIT 13.1
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL Revenue $ 61,538 $ 66,851 $ 73,839 $ 81,808
QUARTER Gross margin 30,081 32,404 38,175 40,956
1995 Net income 1,427 2,919 5,259 17,465
Primary earnings per share .08 .16 .27 .87
Fully diluted earnings per share .08 .16 .27 .83
- ---------------------------------------------------------------------------------------------------------
FISCAL Revenue $ 54,581 $ 55,011 $ 61,245 $ 66,835
QUARTER Gross margin 27,529 28,071 30,897 29,251
1994 Net income (loss) (1,009) (1,545) 330 (4,100)
Primary and fully diluted
earnings (loss) per share (.06) (.09) .02 (.24)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Results for the fourth quarter of fiscal 1995 include a $9.9 million tax
benefit. The $9.9 million benefit increased the quarter's primary earnings per
share by $0.49 and fully diluted earnings per share by $0.45. See Note 14 to the
Consolidated Financial Statements.
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.
- -------------------------------------------------------------------------------
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Years Ended March 31,
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 284,036 $ 237,672 $ 218,846 $ 180,805 $ 135,013
Income (loss) before
extraordinary credit 27,070 (6,324) (11,097) (11,213) (49,559)
Net income (loss) 27,070 (6,324) (11,097) (11,213) (46,111)
Primary earnings (loss) per share 1.44 (.38) (.71) (.76) (3.23)
7 1/4% convertible
subordinated debentures 68,625 68,625 68,625 68,625 68,625
Other long-term obligations - - 52 1,212 2,900
Total assets 232,046 187,015 186,596 178,605 171,723
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 2
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 future 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 data derived from the consolidated statements of
operations expressed as a percentage of revenue for each of the three years in
the period ended March 31, 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Percent of Revenue 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product revenue 67.9 69.8 74.3
Service and other revenue 32.1 30.2 25.7
----- ----- -----
Total revenue 100.0 100.0 100.0
===== ===== =====
Gross margin product revenue 58.9 56.2 61.7
Gross margin service and
other revenue 30.7 31.4 33.0
----- ----- -----
Total gross margin 49.9 48.7 54.3
===== ===== =====
Sales and marketing 24.8 29.9 28.9
Research and development 12.0 14.2 14.7
General and administrative 4.0 5.6 6.3
Restructuring and other
non-recurring charges 0.0 0.0 7.7
----- ----- -----
Total operating expenses 40.8 49.7 57.6
===== ===== =====
Income (loss) from operations 9.1 (1.0) (3.3)
Interest income 0.9 0.6 1.0
Interest expense (1.8) (2.2) (2.4)
Other 0.0 (0.1) (0.4)
----- ----- -----
Income (loss) before income taxes 8.2 (2.7) (5.1)
Income tax benefit 1.3 0.0 0.0
----- ----- -----
Net income (loss) 9.5 (2.7) (5.1)
===== ===== =====
- --------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF 1995 AND 1994
REVENUE. Total revenue in fiscal 1995 increased $46.4 million, or 19.5% from
fiscal 1994. Product revenue and service and other revenue increased $27.1
million and $19.3 million, respectively, for this year. The 16.3% increase in
product revenue is principally due to increased IDNX sales in the
Network Equipment Technologies, Inc. 13
<PAGE> 3
international and U.S. federal channels. International product sales increased
52.9% to 35.9% of product revenue. Contributing to the growth in international
product sales was the Asia Pacific/Latin American region which grew 102.0%.
Product sales in the U.S. federal channel, which includes U.S. government sales
and sales to U.S. government contractors, increased 15.5% to 23.2% of product
revenue. STM sales, sold mostly in the North American and U.S. federal channels,
increased 44.9% in fiscal 1995. Service and other revenue increased 26.9% from
the prior year. This increase is attributable to increases in systems
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 increased 52.7% over last year and in
fiscal 1995 represented 28.1% of the Company's total revenue as compared to
22.0% in fiscal 1994. Sales to the U.S. government grew 19.7% over last year and
represented 27.5% of total revenue in both fiscal 1995 and fiscal 1994.
GROSS MARGIN. Total gross margin as a percentage of total revenue increased to
49.9% in fiscal 1995 from 48.7% in fiscal 1994. Product gross margin increased
to 58.9% in fiscal 1995 from 56.2% in fiscal 1994. The prior year's product
margin was negatively impacted by 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 in fiscal 1994 would have been
58.5%. The increase in fiscal 1995, excluding the fiscal 1994 writedown, was
primarily due to favorable manufacturing variances from higher production
volumes. This was partially offset by a higher volume of lower margin sales to
new customers in the Asia Pacific/Latin American sales channel. The gross margin
for service and other revenue declined to 30.7% in fiscal 1995 from 31.4% in
fiscal 1994 due to a significantly higher mix of lower margin systems
integration services provided under a U.S. government contract. The gross margin
on these systems integration services increased to 11.5% in fiscal 1995 from
9.9% in fiscal 1994 due to the mix of OEM products and services provided.
Management expects product gross margin to continue to be affected by sales
channel and product mix as well as manufacturing volume variances. Service and
other revenue gross margin will also continue to fluctuate as a result of the
changes in mix between systems integration services and other service revenue.
OPERATING EXPENSES. Operating expenses decreased $2.4 million in fiscal 1995.
Operating expenses as a percentage of total revenue decreased to 40.8% in fiscal
1995 from 49.7% in fiscal 1994. This decrease is the result of management's
continuing focus on cost control and increased operating efficiencies.
Management expects the relationship of operating expenses as a percentage of
total revenue to continue to trend downward in fiscal 1996 as planned revenue
growth exceeds that of operating expenses.
Sales and marketing expense decreased $.7 million in fiscal 1995 due to
lower operating costs as a result of increased operating efficiencies offset by
an increase in advertising expense. Sales and marketing expense decreased as a
percentage of total revenue to 24.8% in fiscal 1995 from 29.9% in fiscal 1994.
Management expects sales and marketing expenses to increase in fiscal 1996 while
decreasing as a percentage of planned revenue.
Research and development expense increased $.2 million in fiscal 1995 due
to an increase in direct project funding, including salary related expenses,
offset by a decrease in other operating expenses. The expense as a percentage of
total revenue decreased to 12.0% in fiscal 1995 from 14.2% in fiscal 1994. In
fiscal 1995, $2.0 million of software costs were capitalized as compared to $2.7
million in fiscal 1994. Management plans to continue funding research and
development efforts at levels necessary to advance product programs. While it is
management's intention to continue to focus these development efforts, research
and development spending is expected to increase in fiscal 1996 while decreasing
as a percentage of planned revenue.
14
<PAGE> 4
General and administrative expense in fiscal 1995 decreased to 4.0% of
total revenue as compared to 5.6% in fiscal 1994. The decrease was primarily due
to lower personnel costs realized as a result of consolidating and streamlining
the Company's operations. Management expects general and administrative expense
in fiscal 1996 to be comparable to fiscal 1995.
Interest income in fiscal 1995 increased $1.2 million from fiscal 1994 due
to higher cash balances and higher interest rates. Interest expense, primarily
related to the 7 1/4% convertible subordinated debentures, remained relatively
unchanged at $5.2 million for fiscal 1995 compared to $5.3 million for fiscal
1994. Other expense decreased $.1 million in fiscal 1995 as compared to fiscal
1994.
As a result of the significant increase in profitability during fiscal 1995
and in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company recorded a tax benefit in the fourth
quarter of $9.9 million. Management expects the effective income tax rate to
approximate the U.S. statutory rate of 35% in fiscal 1996. See Note 14 to the
Consolidated Financial Statements.
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 systems integration services in support of product sales to the
U.S. government. Overall, international sales decreased 3.0% over the prior year
and in fiscal 1994 represented 22.0% of the Company's total revenue as compared
to 24.7% in fiscal 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 systems integration services provided
under a U.S. government contract. In addition, the gross margin on these systems
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.
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, in addition
Network Equipment Technologies, Inc. 15
<PAGE> 5
to the fourth quarter charge of $1.7 million for costs related to streamlining
the Company's operations, is primarily the result of additional headcount to
support revenue growth throughout the Company's product and service channels.
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 were 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.
General and administrative expense in fiscal 1994 decreased $.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 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.
The Company did not record a provision for income taxes in fiscal 1994 or
fiscal 1993 due to the losses sustained in those fiscal years.
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 1996. Historically, the majority of the Company's revenues in each
quarter results from orders received and shipped in that 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 large orders do not close when forecasted or if near term demand
for the Company's products weakens, the Company's operating results for that or
subsequent quarters would be adversely affected.
Expense levels are relatively fixed and are set based on expectations
regarding future revenue and margin levels. These expectations involve making
judgments on issues such as future competitive conditions and customer
requirements, a process that involves evaluation of information that is often
unclear and in conflict. All markets for the Company's products are very
competitive and dynamic. The Company has limited visibility into factors that
could influence its revenue and margins, particularly in international markets
that are served primarily by non-exclusive resellers. Moreover, the Company
believes that future operating results will depend on successful development or
introduction of new products and enhancements to existing products and service
offerings, and there can be no guarantee that the Company will succeed in such
efforts.
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. In addition, price competition could adversely
impact 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.
16
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1995, the Company had cash, cash equivalents and temporary cash
investments of $86.6 million, as compared to $41.6 million at the end of fiscal
1994. Cash provided from operations was $43.4 million in fiscal 1995, which was
a $41.2 million increase over the prior year. This increase was principally due
to increases in net income, exclusive of a tax benefit recorded in fiscal 1995,
and accrued liabilities and decreases in accounts receivable and inventories.
Accounts receivable decreased $2.1 million in fiscal 1995 from fiscal 1994 due
to improved operating efficiencies. Days sales outstanding decreased throughout
fiscal 1995. Inventory levels also decreased $2.3 million in fiscal 1995 from
fiscal 1994. The decrease in inventories was the result of efficiencies realized
by consolidating manufacturing operations. The increase in accrued liabilities
is principally related to higher year end accruals related to employee
compensation and benefits.
Net cash used for investing activities in fiscal 1995 consisted primarily
of net purchases of temporary cash investments of $35.0 million, purchases of
property and equipment of $8.3 million and an increase in software production
costs of $2.0 million.
Net cash provided by financing activities in fiscal 1995 is primarily
composed of $12.6 million from the issuance of Common Stock relating to the
employee stock benefit plans. As of March 31, 1995, the Company had available an
unsecured $10.0 million line of credit. Borrowings under this committed
borrowing facility are available through May 1996 and would bear interest at the
bank's base rate (which approximates prime). At March 31, 1995, there were no
outstanding borrowings under this facility.
The Company believes that current cash and cash equivalents, temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development programs
currently planned at least through fiscal 1996.
Network Equipment Technologies, Inc. 17
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
March 31, 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Current assets:
Cash and cash equivalents $ 33,886 $ 23,854
Temporary cash investments 52,734 17,714
Accounts receivable, net of allowances
of $2,514 in 1995 and $3,195 in 1994 56,983 57,432
Inventories 32,314 34,456
Deferred income taxes 9,900 -
Prepaid expenses and other assets 4,625 3,842
-------- --------
Total current assets 190,442 137,298
-------- --------
Property and equipment:
Machinery and equipment 98,969 90,129
Furniture and fixtures 6,863 6,745
Leasehold improvements 10,241 10,713
Construction in progress 1,694 1,789
-------- --------
117,767 109,376
Less accumulated depreciation
and amortization (90,618) (75,990)
-------- --------
Property and equipment, net 27,149 33,386
Software production costs, net 4,691 5,520
Other assets 9,764 10,811
-------- --------
$232,046 $187,015
======== ========
- --------------------------------------------------------------------------------------------
LIABILITIES AND Current liabilities:
STOCKHOLDERS' Accounts payable $ 18,315 $ 20,225
EQUITY Accrued liabilities 43,444 38,883
Notes payable and current portion
of long-term obligations - 26
-------- --------
Total current liabilities 61,759 59,134
-------- --------
Deferred income taxes - 328
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 32 268
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 18,714,000 shares in 1995
and 17,097,000 shares in 1994 187 171
Additional paid-in capital 113,846 98,315
Unrealized loss on available-for-sale
securities (10) -
Accumulated translation adjustment (794) (1,157)
Accumulated deficit (11,599) (38,669)
-------- --------
Total stockholders' equity 101,662 58,928
-------- --------
$232,046 $187,015
======== ========
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Years Ended March 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE Product revenue $192,901 $165,842 $162,542
Service and other revenue 91,135 71,830 56,304
-------- -------- --------
Total revenue 284,036 237,672 218,846
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------
COST OF SALES Cost of product revenue 79,227 72,647 62,181
Cost of service and other revenue 63,193 49,277 37,735
-------- -------- --------
Total cost of sales 142,420 121,924 99,916
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------
GROSS MARGIN 141,616 115,748 118,930
- -----------------------------------------------------------------------------------------------------------
OPERATING Sales and marketing 70,348 71,064 63,170
EXPENSES Research and development 33,923 33,736 32,200
General and administrative 11,375 13,229 13,680
Restructuring and other non-recurring charges - - 17,000
-------- -------- --------
Total operating expenses 115,646 118,029 126,050
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------
Income (loss) from operations 25,970 (2,281) (7,120)
Interest income 2,626 1,411 2,105
Interest expense (5,213) (5,276) (5,274)
Other (73) (178) (808)
-------- -------- --------
Income (loss) before income taxes 23,310 (6,324) (11,097)
Income tax benefit 3,760 - -
-------- -------- --------
Net income (loss) $ 27,070 $ (6,324) $(11,097)
======== ======== ========
- -----------------------------------------------------------------------------------------------------------
NET INCOME Primary $ 1.44 $ (.38) $ (.71)
(LOSS) PER SHARE ======== ======== ========
Fully diluted $ 1.37 $ (.38) $ (.71)
======== ======== ========
- -----------------------------------------------------------------------------------------------------------
SHARES USED IN Primary 18,768 16,778 15,721
COMPUTATION ======== ======== ========
Fully diluted 19,794 16,778 15,721
======== ======== ========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Network Equipment Technologies, Inc. 19
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Years Ended March 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 23,854 $ 30,080 $ 20,132
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS Net income (loss) 27,070 (6,324) (11,097)
FROM OPERATING Adjustments required to reconcile net income
ACTIVITIES (loss) to cash provided by operations:
Depreciation and amortization 17,591 19,469 19,648
Restructuring and other non-recurring charges - - 17,000
Writedown of excess ATMX inventory
and fixed assets - 3,764 -
Restricted stock compensation 10 391 518
Deferred income taxes (9,900) - -
Changes in assets and liabilities:
Accounts receivable 2,077 (7,042) (3,344)
Inventories 2,280 (12,293) (4,712)
Prepaid expenses and other assets (621) (81) 63
Accounts payable (2,092) 4,621 3,021
Accrued liabilities (net of restructuring reserves) 6,941 (351) 1,604
-------- -------- --------
Net cash provided by operations 43,356 2,154 22,701
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS Purchases of temporary cash investments (60,816) (30,414) (35,758)
FROM INVESTING Proceeds from maturities of temporary cash investments 25,786 34,722 38,407
ACTIVITIES Additions to property and equipment (8,258) (14,273) (15,612)
Additions to software production costs (1,968) (2,681) (3,441)
Other 903 1,728 948
-------- -------- --------
Net cash used for investing activities (44,353) (10,918) (15,456)
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS Sale of Common Stock 12,583 4,179 4,408
FROM FINANCING Purchase of Common Stock - (600) -
ACTIVITIES Repayments of borrowings (26) (1,074) (1,645)
-------- -------- --------
Net cash provided by financing activities 12,557 2,505 2,763
-------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,528) 33 (60)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 10,032 (6,226) 9,948
-------- -------- --------
Cash and cash equivalents at end of year $ 33,886 $ 23,854 $ 30,080
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
OTHER CASH Cash paid (refunded) during the year for:
FLOW Interest $ 5,213 $ 5,276 $ 5,274
INFORMATION Income taxes $ 2,061 $ 65 $ (1,185)
Non-cash investing and financing activities:
Net unrealized loss on securities $ 10 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE> 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized
Common Gain (Loss)
Stock Additional on Available- Accumulated
To Be Common Paid-In For-Sale Translation Accumulated
(Dollars in thousands) Issued Stock Capital Securities Adjustment Deficit
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MARCH 31, 1992 $ - $ 154 $ 85,137 $ - $ (176) $(21,248)
------- ----- -------- ---- ------- --------
- --------------------------------------------------------------------------------------------------------------------------------
Sale of 623,000 shares of Common
Stock 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 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)
------- ----- -------- ---- ------- --------
- --------------------------------------------------------------------------------------------------------------------------------
Sale of 1,586,000 shares of Common
Stock under employee stock
benefit plans - 16 12,577 - - -
Stock issued in connection with merger (236) - 236 - - -
Income tax benefit arising from
employee stock option plans - - 2,718 - - -
Net unrealized gain on securities upon
adoption of SFASNo. 115 - - - 64 - -
Net unrealized loss on securities - - - (74) - -
Accumulated translation adjustment - - - - 363 -
Net income - - - - - 27,070
------- ----- -------- ---- ------- --------
BALANCES, MARCH 31, 1995 $ 32 $ 187 $113,846 $(10) $ (794) $(11,599)
======= ===== ======== ==== ======= ========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Network Equipment Technologies, Inc. 21
<PAGE> 11
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. The Company recognizes product revenue and accrues related
warranty expense upon shipment. At the time of sale, no material vendor or post
contract support obligations remain outstanding. Revenue from service contracts
is recognized ratably over the contract period. Revenue from other services,
such as installation and training, is recognized when the service is performed.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with maturities of three months or less at the time of acquisition.
TEMPORARY CASH INVESTMENTS. Temporary cash investments are primarily comprised
of highly liquid investments with maturity dates of greater than three months at
the time of acquisition.
CONCENTRATION OF CREDIT RISK. The Company sells its products primarily to 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) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Purchased components $11,498 $12,608
Work-in-process 17,175 18,618
Finished goods 3,641 3,230
------- -------
$32,314 $34,456
======= =======
- -------------------------------------------------------------------------------
</TABLE>
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. 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 $2.0 million, $2.7
million and $3.4 million in fiscal 1995, 1994 and 1993, respectively. Software
production costs are amortized over the lives of the products, generally three
years. Amortization amounted to $2.8 million, $3.3 million and $3.6 million in
fiscal 1995, 1994 and 1993, respectively. Accumulated amortization was $20.8
million and $18.0 million at March 31, 1995 and 1994.
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
22
<PAGE> 12
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, 1995, the Company had outstanding
foreign exchange contracts of $13.0 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 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 is adjusted for the interest
expense (net of income taxes) related to the debentures.
RECLASSIFICATION. Certain fiscal 1994 and 1993 amounts have been reclassified to
conform with fiscal 1995 presentation.
NOTE 2 TEMPORARY CASH INVESTMENTS
Effective April 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." The Company has classified all of its temporary cash
investments as "available-for-sale securities." The carrying value of such
securities is adjusted to fair market value, with unrealized gains and losses,
net of deferred taxes, being excluded from earnings and reported as a separate
component of stockholders' equity. As of April 1, 1994, the net unrealized
holding gain was $99 thousand ($64 thousand, net of tax). At March 31, 1994,
temporary cash investments are stated at the lower of aggregate cost or market.
Temporary cash investments at March 31 consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 1994
------------------------------------------------- ---------
Gross Gross
Amortized Unrealized Unrealized Market Amortized
(Dollars in thousands) Cost Gains Losses Value Cost
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate notes and bonds $22,839 $40 $40 $22,839 $14,750
Commercial paper and banker's
acceptances 9,208 5 10 9,203 1,964
Certificates of deposit 8,008 - 14 7,994 -
Foreign debt issues 5,588 6 2 5,592 -
U.S. government and municipalities 5,107 11 12 5,106 1,000
Equity securities 2,000 - - 2,000 -
------- --- --- ------- -------
$52,750 $62 $78 $52,734 $17,714
======= === === ======= =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1995, all available-for-sale securities mature within one year.
There were no realized gains or losses from the sale of securities in fiscal
years 1995, 1994 and 1993.
Network Equipment Technologies, Inc. 23
<PAGE> 13
NOTE 3 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 and $10.0 million for the closure of the
Access Products Division manufacturing location, employee severance and other
related costs. The $17.0 million charge reduced fiscal 1993 earnings per share
by $1.08.
NOTE 4 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 588,200 shares of Common Stock
to be issued, 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 5 RELATIONSHIP WITH IBM
The Company has agreements with International Business Machines Corporation
(IBM) that provide, among other things, that IBM have 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 8%, 11% and 15% of revenue in fiscal years 1995,
1994 and 1993, respectively.
NOTE 6 SALES TO THE U.S. GOVERNMENT
Sales to the U.S. government and its agencies amounted to 28%, 28% and 24% of
revenue for fiscal years 1995, 1994 and 1993, respectively. These amounts
include sales, which amounted to 19%, 20% and 17% of revenue for fiscal years
1995, 1994 and 1993, 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.
24
<PAGE> 14
NOTE 7 SEGMENT INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) United States Europe Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1995
Sales to unaffiliated customers $236,535 $47,501 $ - $284,036
Sales to foreign affiliates 24,409 3,624 (28,033) -
-------- ------- -------- --------
Total revenue $260,944 $51,125 $(28,033) $284,036
======== ======= ======== ========
Operating income $ 23,601 $ 2,938 $ (569) $ 25,970
======== ======= ======== ========
Identifiable assets at year end $235,910 $32,146 $(36,010) $232,046
======== ======= ======== ========
YEAR ENDED MARCH 31, 1994
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
======== ======= ======== ========
YEAR ENDED MARCH 31, 1993
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 $13,372 $(17,079) $186,596
======== ======= ======== ========
- -----------------------------------------------------------------------------------------------------
</TABLE>
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 $32.3 million, $22.0 million and $28.5 million of export sales in fiscal
years 1995, 1994 and 1993, respectively.
NOTE 8 ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation and benefits $19,512 $15,169
Unearned income 7,272 7,326
Other 16,660 16,388
------- -------
$43,444 $38,883
======= =======
- -----------------------------------------------------------------------------------------------------
</TABLE>
Network Equipment Technologies, Inc. 25
<PAGE> 15
NOTE 9 FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1996 and would bear
interest at the bank's base rate (which approximates prime). The terms of the
agreement require that the Company maintain certain financial covenants
including a minimum of $25.0 million in cash and short term, highly liquid
investments, net of any bank borrowings, no quarterly operating or net losses
greater than 10% of tangible net worth and no operating or net losses in any two
consecutive quarters of the fiscal year. The Company was in compliance with
these covenants at March 31, 1995. There were no outstanding borrowings under
the line of credit agreement at March 31, 1995.
NOTE 10 LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum future
lease commitments under these leases as of March 31, 1995, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
1996 $ 6,957
1997 6,521
1998 5,758
1999 3,548
2000 1,143
After 2000 4,370
-------
$28,297
=======
</TABLE>
Rental expense under operating leases was $6.4 million, $6.9 million and $6.8
million for the three years ended March 31, 1995.
NOTE 11 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 102.9% of face value on May
15, 1995, 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.
NOTE 12 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
26
<PAGE> 16
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 $120.00. 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, 1995, the Company had reserved shares of its Common Stock for
the following purposes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Reserved
- -------------------------------------------------------------------------------
<S> <C>
Stock option plans:
Outstanding (at $4.00 to $29.88 per share) 3,012,462
Available for grant 766,116
Convertible subordinated debentures 2,178,571
Employee stock purchase plan 582,810
Shares to be issued in connection with Adaptive merger 5,292
- -------------------------------------------------------------------------------
</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 carry certain restrictions on transferability, which lapse over the
vesting period (generally two to four years). As of March 31, 1995, 172,500
shares at $.01 per share have been awarded and issued under the Plan. As of
March 31, 1995, the Company had the right to repurchase 5,000 shares from an
officer at the original purchase price. Such right expires ratably over the
respective vesting periods. Related compensation expense totaled $10 thousand,
$391 thousand and $518 thousand for the years ended March 31, 1995, 1994 and
1993, respectively.
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, 1995, no
preferred shares were outstanding.
Network Equipment Technologies, Inc. 27
<PAGE> 17
NOTE 13 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, 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
Granted 654,862 7.50 - 27.38
Exercised (1,352,107) 5.25 - 16.25
Cancelled (465,028) 5.75 - 26.33
----------
Options outstanding at March 31, 1995 3,012,462 $4.00 - $29.88
========== ===============
- --------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1995, options for 1,628,899 shares were exercisable at prices
ranging from $4.00 to $29.88 per share.
NOTE 14 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
consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $20,563 $(2,333) $(11,323)
Foreign 2,747 (3,991) 226
------- ------- --------
$23,310 $(6,324) $(11,097)
======= ======= ========
Provision (benefit) for income taxes:
Current:
Federal $ 6,140 $ - $ -
State - - -
Foreign - - -
------- ------- --------
$ 6,140 - -
------- ------- --------
Deferred:
Federal (8,227) - -
State (1,673) - -
Foreign - - -
------- ------- --------
(9,900) - -
------- ------- --------
$(3,760) $ - $ -
======= ======= ========
- --------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 18
The provision (benefit) for income taxes reconciles to the amount computed by
applying the statutory U.S. federal rate of 35% (34.25% for 1993) to income
(loss) before taxes as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax provision (benefit) $ 8,159 $(2,150) $(3,773)
State taxes net of federal income tax benefit 1,399 (126) (122)
Change in valuation allowance (14,341) 1,671 1,305
Nondeductible merger costs - - 1,700
Other 1,023 605 890
-------- ------- -------
Provision (benefit) for income taxes $ (3,760) $ - $ -
======== ======= =======
- ----------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at March 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalized software production costs $(3,632) $ (2,208)
------- --------
Gross deferred tax liabilities $(3,632) $ (2,208)
------- --------
Reserves not currently deductible for tax purposes $ 8,529 $ 7,836
Depreciation 2,403 1,717
Restructuring costs 141 851
Loss carryforwards 1,664 7,271
Credit carryforwards 5,458 4,994
------- --------
Gross deferred tax assets $18,195 $ 22,669
Deferred tax assets valuation allowance $(4,663) $(20,461)
------- --------
Net deferred tax assets $13,532 $ 2,208
------- --------
Net deferred tax assets (liabilities) $ 9,900 $ -
======= ========
- ----------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance for deferred tax assets as of March 31, 1994, was $20.5
million. The net change in the total valuation allowance for the year ended
March 31, 1995, was a decrease of $15.8 million. Of this amount, $5.9 million
resulted from the realization of tax benefits of temporary differences and loss
carryforwards which reversed during the year ended March 31, 1995. The remaining
$9.9 million decrease resulted from the Company's reevaluation during the fourth
quarter of fiscal 1995 that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit associated
with future deductible temporary differences and related loss and credit
carryforwards prior to their expiration. The net reduction in the valuation
allowance for 1995 differs from that recorded as a reduction to income tax
expense by an amount attributable to the tax benefit associated with deductible
employee stock option compensation. A valuation allowance of $4.7 million
remains at March 31, 1995, and is primarily attributable to loss and credit
carryforwards.
As of March 31, 1995, the Company has available federal tax credit
carryforwards of $3.3 million, expiring in years 2000 through 2007, and
alternative minimum tax credit carryforwards of $2.1 million, available
indefinitely. Foreign tax loss carryforwards of $4.1 million are available for
use in reducing future taxable income in certain foreign jurisdictions.
Network Equipment Technologies, Inc. 29
<PAGE> 19
The Company's federal income tax returns for certain prior years are under
examination by the Internal Revenue Service (IRS). The IRS has proposed certain
adjustments which relate substantially to the timing (years) of tax deductions.
The Company does not agree with the IRS position on these matters and is
contesting the proposed adjustments through the IRS appeals process. In the
opinion of management, any adjustments that may result from the ultimate
resolution of these matters will not have a material effect on the Company's
financial condition or results of operations.
NOTE 15 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 $846 thousand, $750 thousand and $652
thousand for fiscal 1995, 1994 and 1993, respectively.
NOTE 16 FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The following summary disclosures are made in accordance with the provisions of
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on- and off-balance
sheet financial instruments where it is practicable to estimate the value. Fair
value is defined in SFAS No. 107 as the amount at which an instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. It is not the Company's intent to enter into such
exchanges.
Because SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements, any aggregation of
the fair value amounts presented would not represent the underlying value of the
Company.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
March 31,1995 March 31, 1994
--------------------- ---------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $33,886 $33,886 $23,854 $23,854
Temporary cash investments $52,734 $52,734 $17,714 $17,813
LIABILITIES
Foreign exchange contracts $13,052 $13,399 $ 7,815 $ 7,857
Convertible subordinated debentures $68,625 $60,304 $68,625 $56,101
- ------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and cash equivalents: the carrying amounts reported in the balance sheets
for cash and cash equivalents approximate their estimated fair values.
Temporary cash investments, foreign exchange contracts and convertible
subordinated debentures: fair values are based on quoted market prices.
30
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND DIRECTORS OF NETWORK EQUIPMENT TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of Network
Equipment Technologies, Inc. and subsidiaries as of March 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Jose, California
April 19, 1995
Network Equipment Technologies, Inc. 31
<PAGE> 21
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 1995 High Low
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
First quarter $10.00 $ 7.38
Second quarter 14.88 8.25
Third quarter 24.00 12.50
Fourth quarter 27.88 22.38
- ---------------------------------------------------------------------------------------------
Fiscal 1994 High Low
- ---------------------------------------------------------------------------------------------
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>
In addition, the Company's 7 1/4% Convertible Subordinated Debentures trade in
the over-the-counter market.
IDNX is a registered trademark, and N.E.T., the N.E.T. logo, SONET Transmission
Manager, and STM are trademarks of Network Equipment Technologies, Inc. All
other trademarks are the sole property of their respective companies.
(C) 1995 Network Equipment Technologies, Inc. All rights reserved.
C Printed on recycled paper. Printed in U.S.A.
Design & Production / Hausman Design, Palo Alto, CA.
LIT122-0695-25K
32
<PAGE> 1
EXHIBIT 21.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C>
N.E.T. Federal, Inc. .................... (State of Incorporation: Delaware)
N.E.T. Credit Corporation................ (State of Incorporation: California)
N.E.T. APLA, Inc. ....................... (State of Incorporation: Delaware)
N.E.T. Europe Ltd. ...................... (Incorporated Under the Laws of England)
N.E.T. Europe SA......................... (Incorporated Under the Laws of France)
Comdesign International, Inc. ........... (Incorporated Under the Laws of U.S. Virgin Islands)
N.E.T. International, Inc. .............. (Incorporated Under the Laws of Barbados)
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-33013, No. 33-33063 and No. 33-68860 on Forms S-8 and Registration Statement
No. 33-45815 on Form S-3 of our reports dated April 19, 1995, appearing and
incorporated by reference in this Annual Report on Form 10-K of Network
Equipment Technologies, Inc. for the year ended March 31, 1995.
DELOITTE & TOUCHE LLP
San Jose, California
June 21, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 33,886
<SECURITIES> 52,734
<RECEIVABLES> 59,497
<ALLOWANCES> 2,514
<INVENTORY> 32,314
<CURRENT-ASSETS> 190,442
<PP&E> 117,767
<DEPRECIATION> (90,618)
<TOTAL-ASSETS> 232,046
<CURRENT-LIABILITIES> 61,759
<BONDS> 68,625
<COMMON> 219,000
0
0
<OTHER-SE> 101,443
<TOTAL-LIABILITY-AND-EQUITY> 232,046
<SALES> 192,901
<TOTAL-REVENUES> 284,036
<CGS> 79,227
<TOTAL-COSTS> 142,420
<OTHER-EXPENSES> 115,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,213)
<INCOME-PRETAX> 23,310
<INCOME-TAX> (3,760)
<INCOME-CONTINUING> 23,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,070
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.37
</TABLE>
