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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15323
NETWORK EQUIPMENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2904044
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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800 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(415) 366-4400
(Address of principal executive offices, including zip code,
area code, and telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
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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, 1996 was $578,989,208.
The number of shares outstanding of the Common Stock, $0.01 par value, on
May 31, 1996 was 20,886,937.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's Annual Report to Stockholders for the fiscal year ended
March 31, 1996 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 13, 1996 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
headquartered in Redwood City, California, has more than 1,300 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. N.E.T. is a leading worldwide supplier of
multiservice backbone networks to enterprises and global carriers.
For over a decade, N.E.T. has manufactured and supported products for
wide-area networks ("WANs"). These networking products, known as multiservice
bandwidth managers, integrate multiple applications (video, voice, image and
data) and use multiple technologies (packet- and circuit-switching).
Multiservice bandwidth managers are used to construct N.E.T.-TM- multiservice
backbone networks for enterprises or are used by carriers as service
provisioning edge nodes. Designed for reliability, flexibility and compliance
with national and international standards, the Company's products manage
business communications traffic across the wide area and are backed by an
extensive service and support infrastructure. Many carriers, enterprises and
government agencies around the world use N.E.T. solutions to provide
cost-effective and reliable digital communications services.
When used in this document the words "believes", "anticipates", "future",
"expects", "will", "intends", "strategy", "planned" and similar words identify
forward-looking statements. Actual results may differ materially from such
forward-looking statements as a result of risks and uncertainties, including
those described below and others as set forth in the Company's subsequent
periodic reports filed with the Securities and Exchange Commission or available
at the Company's worldwide web site (http://www.net.com).
NETWORKING INDUSTRY
The Company believes that certain factors in the worldwide
telecommunications equipment industry are likely to result in continued growth
for that industry. The worldwide move to market economies is creating an
environment that the Company believes is conducive to investment in
communications infrastructures in both the carrier and enterprise segments. At
the same time, the worldwide deregulation of telecommunications operators is
creating a highly competitive environment that is resulting in an increase in
investment in carrier equipment to support the proliferation of innovative
services. Furthermore, continuing innovations in semiconductor technology are
enabling both a massive increase in compute power and in a distribution of that
power to the desktop. This, in turn, continues to create a massive increase in
the demand for data bandwidth in the local area that acts as a driver for
increasing amounts of bandwidth across the wide area.
So, over the last two decades the communications requirements of
organizations have grown as a result of changes in both the telecommunications
and general business environments. Telecommunications deregulation, beginning in
the United States in the early 1980s and advancing further following recent
legislation, coupled with increasing volumes and types of communications traffic
within many organizations encouraged the growth of backbone networks. More
recently, global alliances are being formed by major telecommunications carriers
and the Company believes that these alliances and their offerings are likely to
have a major impact on the development of international networking capabilities.
Bandwidth managers are sophisticated networking platforms that manage these
increasing amounts of bandwidth on backbone networks around the world.
In response to the expanding requirements for bandwidth managers to support
multiple technologies, application types and services on a single communications
platform, multiservice bandwidth managers have been developed. Such platforms
enable the construction of multiservice backbone
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networks, enabling users to avoid being restricted or "locked-in" to a single
technology or type of application. Multiservice bandwidth managers provide
flexibility that enables the customization of a network to meet current needs
and allows the addition of technologies and applications in the future.
N.E.T. provides multiservice backbone networks to both main WAN market
segments: enterprise and carrier. The enterprise network segment generally
refers to communications solutions whereby equipment is owned and managed by
enterprises and is located on their premises. The public network segment
includes carrier-owned equipment and services provided by carriers. Public
network equipment is generally located on carriers' premises. However, 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. This blurring of the line between public and
private networks has made hybrid networking (a mix of public and private
solutions) more common.
Carriers, or network service providers, focus on the provision of advanced
business services and are increasing their wide-area networking market share
with their virtual private network ("VPN") and fast packet (frame-relay and ATM)
strategies. As worldwide deregulation continues to progress, leading carriers
have teamed to form global consortia to provide advanced network services to
large businesses. N.E.T. provides service provisioning edge nodes to many of
these global carriers as they expand and redefine their roles in the rapidly
changing telecommunications industry.
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") has driven the need for
greater connectivity of LANs and over the past decade the proportion of
LAN-originated traffic on the WAN has increased 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") 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 deregulation of telecommunications worldwide, the growth of
business traffic and networking needs and advancements in communications
technology and capacity have all combined to dramatically increase the
complexity, opportunities and competitiveness of the markets in which N.E.T.
operates (see "Competition").
COMPANY STRATEGY
N.E.T.'s mission is to be the premier worldwide supplier of multiservice
backbone networks to enterprises, government agencies and carriers and also of
service provisioning edge nodes to carriers. The Company's strategy is to focus
its products, services and distribution capabilities to address the needs of
these market segments, and, furthermore, it believes that the key wide-area
network market segments it has selected offer a broad range of regional and
global opportunities. The Company's networking products provide distributed
intelligence to manage data and voice bandwidth efficiently for enterprise and
carrier customers, and its service organization provides technical assistance,
installation and maintenance services as well as systems integration and project
management capabilities, thus providing the support necessary for total network
solutions.
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The Company's products and services allow enterprises to build multiservice
backbone networks using private and/or public resources (i.e. services,
equipment and staff), thus leveraging their network alternatives. Similarly,
government agencies are provided with sophisticated, reliable backbone networks
and systems integration services. The needs of global carriers are addressed
through the supply of flexible multiservice platforms. These products may be
used by carriers as service provisioning edge nodes -- enabling carriers to
easily add service overlays to their existing network infrastructures and offer
value-added network services to businesses -- or they may be used to build
multiservice network infrastructures, especially in developing countries (where
they are known as digital data networks or "DDNs"). The Company offers
narrowband and broadband network products. In response to the long-term trend
towards broadband networking, the Company is expanding its strategic core
competencies by developing wide-area ATM products, and has announced its network
architecture -- known as the N.E.T. Vista Architecture -- that provides the
framework for implementation of its product strategy.
Vista is a multiservice network architecture for the wide area. It comprises
products and services for data and voice networking: it encompasses narrowband
and broadband applications, leveraging packet and circuit technologies, for
carriers and enterprises. The Company believes that its standards-based ATM
switching core, currently under development, will provide the levels of
availability that carriers require and enterprises are coming to expect. Vista
takes a systems view of wide-area networking, combining best-of-class narrowband
and broadband network elements with standards-based network management. Enhanced
multiservice bandwidth managers and other devices, collectively referred to as
ATM Service Interfaces ("ASIs"), are being defined to interoperate with an ATM
switching core in order to address the need for incorporation of ATM
capabilities within multiservice backbone networks. The Company's partnership
and OEM strategies take into account its decision to offer best-of-class
products covering a wide range of specific adaptation and aggregation functions:
they are designed to fulfill this requirement by building strategic
relationships with vendors of leading products for enterprise and carrier
markets.
The Company's strategic relationships involve links with equipment
manufacturers and resellers, global carriers, network service providers and
significant customers in the enterprise and carrier arenas worldwide. Objectives
of these relationships vary, ranging from technology licensing agreements,
through OEM and reseller agreements, to joint product development plans and
sales and marketing programs. Most of the Company's competitors have similar
relationships with their respective customers and other parties. Changes in the
Company's relationships or changes in similar relationships among competitors
could have a material impact on competitive and other factors described in this
document, including the Company's operating results. Also, litigation or other
claims based on securities, intellectual property, patent, product, regulatory
or other factors could materially adversely affect the Company's business,
operating results and finances.
PRODUCTS
The Company maintains a single engineering and manufacturing organization
that is responsible for the design, development and manufacture of all of its
products. This organization produces hardware and software network systems for
enterprises and carriers -- offering sophisticated bandwidth management,
connectivity, transmission and network management across the wide area. N.E.T.'s
core multiservice bandwidth managers and frame-relay product lines provide
solutions designed to optimize use of T1, E1, T3 and E3 services. The Company's
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 LAN internetworking products enhance connectivity and interoperability
among devices that transmit information between LANs across WANs. The Company
also develops and supports network management systems to enhance operator
visibility into network conditions, permitting greater control and management of
networks.
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N.E.T. believes it must continue to develop and enhance its product lines to
meet the needs of its strategic markets as they progress. 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.
N.E.T.'s multiservice, frame-relay and broadband networks are designed to
take advantage of distributed network intelligence. This means that all
platforms designed by N.E.T. 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.
N.E.T.'s networking nodes perform multiplexing and routing (including rapid
automatic re-routing), have sophisticated network intelligence and are designed
to accommodate hybrid public/ private networking. 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 automatic 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.
Multiservice Bandwidth Managers
N.E.T.'s IDNX-Registered Trademark- multiservice bandwidth managers allow
users of voice, data, image and video communications to achieve full potential
from wide-area networks in a highly cost-effective manner. This family performs
packet- and circuit-switching: managing each traffic type. N.E.T.'s multiservice
platforms offer a wide range of interfaces to customer premise equipment ("CPE")
and support 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
many other time division multiplexing products, 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.
Integral to these multiservice platforms is N.E.T.'s Packet Exchange ("PX")
family of packet processors -- modules that provide support for internetworking
activities and switched services. There are three main product types:
Multiprotocol Routers
The LAN/WAN Exchange-TM- ("LWX") module provides multiprotocol routing with
concurrent bridging support to interconnect geographically dispersed LANs over a
WAN. It is compatible with Cisco 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.
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Frame-Relay Systems
The FrameXpress-TM- ("FRX") family of products, consisting of modules and
systems, is available in a variety of configurations. The FRX modules or systems
provide frame-relay access to bridges, routers, front-end processors and other
CPE devices that support frame-relay interfaces, and can also
connect to public frame-relay networks. N.E.T.'s FrameXpress products allow the
integration of traffic from many different sources onto a consolidated
frame-relay or multiservice backbone network, and provide an efficient,
effective transport mechanism for a variety of bursty traffic types.
ISDN Systems
The Integrated Services Digital Network Exchange ("ISDNX-TM-") module
supports 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 multiservice backbone network via an industry-standard Primary
Rate Interface ("PRI"). The signaling capabilities of the ISDNX module provide
an intelligent connection and offer ISDN services to an attached ISDN device.
N.E.T. markets a comprehensive frame-relay product line which combines
products from other vendors, such as Cascade and Sync Research, with the
Company's own internally-developed FrameXpress family. For very concentrated
data applications, N.E.T. resells Cascade's high-capacity STDX-TM- and
B-STDX-TM- switches that provide high port-density configurations. For smaller
locations, N.E.T. markets Sync Research's FrameNode-TM- frame-relay access
device ("FRAD") that provides branch offices with WAN access to private
frame-relay or multiservice backbone networks or public frame-relay services.
Broadband Switches
SONET Transmission Manager-TM- ("STM-TM-") broadband switches 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, intelligent networking, inverse multiplexing and
compliance with T1, fractional T3, T3 and OC-3 carrier services. With its
service availability, network management operation through end-to-end connection
management and dynamic connection re-route and restoration, the STM addresses
the needs of carriers, and is particularly well-suited to the needs of cellular
service providers. STM broadband networks also provide wide-area communications
infrastructures capable of supporting mainframe channel extension, high-speed
router, CAD/CAM and other applications requiring high-capacity. Also, traffic
from T1-based devices, such as videos, PBXs, routers and T1 multiplexers can be
integrated, making STM networks suited to large enterprises.
Other network products developed by the Company such as SPX-TM- statistical
multiplexers and ADNX-Registered Trademark-/48 Integrated Access Multiplexers
provide opportunities for incremental revenue, but the Company expects revenue
from these particular products to decline over the next few years.
The commercial availability of all of the Company's products and services in
a timely manner and their acceptance by customers are important to the future
success of the Company. There can be no assurance that customer acceptance of
products and services will be achieved or maintained. Substantial delays in such
availability or acceptance would materially and adversely affect the Company's
operating results and financial condition.
Network Management Systems
NetOpen-TM- network management systems enhance customers' ability to control
and monitor a network and to diagnose and respond to changes or failures in
equipment and transmission resources, thus increasing the productivity and
responsiveness of customers' network management staff, increasing operational
efficiency and reducing cost. N.E.T.'s network management systems provide
multi-user real-time monitoring, control and management for the Company's
products. They offer various capabilities, including: color graphical
representations of network topology and network
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elements, with object states that change color to reflect alarm conditions; the
ability to software partition a physical multiservice backbone network into
multiple, independent virtual networks; and, for frame-relay systems, collection
and storage of information about network usage, enabling this data to be
accessed for detailed traffic analysis activities such as billing and capacity
planning.
MARKETING, DISTRIBUTION AND CUSTOMERS
N.E.T.'s marketing strategy focuses on information-intensive organizations
that have extensive voice, data, image and video communications needs. N.E.T.
targets enterprises, carriers and government agencies in four main market
segments -- U.S. commercial, U.S. Federal, carriers and international.
Enterprises include banks and other financial institutions, airlines, retail
chains and manufacturers. Carrier organizations include telephone companies
around the world, DDN operators, cellular network service providers and
value-added network ("VAN") suppliers. Government agencies include U.S.
government defense, intelligence and civilian agencies. Increasingly, the
Company has been supplying its products to or through other entities, such as
outsourcers and systems integrators, as prospective customers turn to them to
provide network services and operational capabilities.
The Company employs 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. N.E.T.
maintains subsidiaries that focus on sales to the European market (N.E.T. Europe
Ltd., N.E.T. Europe SA and N.E.T. Europe GmbH) and to the U.S. government
(N.E.T. Federal, Inc.).
Apart from the U.S. government, no other single customer account was
responsible for ten percent or more of revenue during fiscal 1996 or 1995; one
other customer (IBM) accounted for 11% of revenue in fiscal 1994.
International Sales
N.E.T. has established subsidiaries in the U.K. (N.E.T. Europe Ltd.), France
(N.E.T. Europe SA), and Germany (N.E.T. Europe GmbH), 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., Uruguay, China and other
countries in the regions of Asia Pacific and Latin America. International sales
represented 27%, 28% and 22% of the Company's revenue in fiscal 1996, 1995 and
1994, 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 wide-area communications products for
use in private or hybrid networks in such countries. Financial information
regarding foreign operations and export sales is discussed in Note 4 in the
"Notes to Consolidated Financial Statements" in the Company's 1996 Annual Report
to Stockholders ("Annual Report") filed as Exhibit 12.1 to this report.
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
multiservice bandwidth manager 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
information to coordinate product development. The Company also appointed
certain Ericsson affiliates as non-exclusive distributors of the Company's
products.
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-
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exclusive, worldwide marketing, installation and service rights for current and
future releases of N.E.T.'s IDNX multiservice bandwidth manager products and
certain related products. Under the IBM Agreement and other agreements, IBM
licensed to N.E.T. several of its technologies. IBM is also an end-user customer
of N.E.T.'s products under the IBM Agreement. N.E.T. and IBM continue to have an
active distribution relationship and a number of active technology agreements.
Sales to the U.S. Government
N.E.T.'s wholly owned subsidiary, N.E.T. Federal, Inc., markets the
Company's products to United States governmental entities both directly and
through collaborative government contracting and subcontracting arrangements. It
has entered into several contracts under which it provides its products and
services to various government agencies (the "Government Contracts"). The
Government Contracts encompass varying periods, but most may be terminated by
such government agencies at their convenience or at annual intervals. In fiscal
1996, 1995 and 1994, sales to the U.S. Government accounted for 34%, 28% and
28%, respectively, of N.E.T.'s total revenue. These amounts include sales, which
amounted to 30%, 19% and 20% of revenue for fiscal years 1996, 1995 and 1994,
respectively, under a contract with the Department of Defense under which
various government agencies can order products, installation and service from
N.E.T.
The Company's relationships with carriers further expand the availability of
N.E.T. products and services based on those products. These relationships
include joint marketing agreements with both AT&T and MCI, and a systems
integration agreement with Bell Atlantic Network Integration. The Company's
products are offered by other carriers around the world, such as US WEST and
Southwestern Bell in the U.S., and France Telecom, Telia and Tele-Danmark in
Europe.
The Company has entered into distribution and technology agreements with
many other companies, including Datacraft Asia.
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. Although these channels and their distribution capabilities
are extensive, their levels of sales activity and knowledge of N.E.T. products
vary widely over time and on a geographic basis. In addition, the Company faces
distribution challenges for its next generation products which could impact the
Company's ability to leverage its products as they are introduced, and could
negatively affect the Company's performance.
In recent years, the Company has experienced decreases in first quarter
revenue versus the preceding fourth quarter and this trend is expected to
continue. Historically, the majority of the Company's revenue 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 19 of the Company's 1996 Annual
Report.
CUSTOMER SERVICE AND SUPPORT
N.E.T.'s service strategy is to provide superior support for its own
products and other vendors' products when appropriate. The Company provides a
wide range of service and support options for its products including
installation, a choice of different hardware and software maintenance programs,
upgrades and repairs, technical assistance and training for many categories of
network staff. N.E.T. has also performed a significant amount of systems
integration business for the U.S. Department of Defense ("DoD"), and N.E.T.'s
strategy includes leveraging the experience gained to extend this aspect of its
service business -- thus adding professional services that go beyond the
traditional installation and maintenance services typically offered. In this
regard, a "template" for systems
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integration services and network operations services has been developed by
N.E.T. Federal to meet the needs of the DoD, and management intends to use this
template to extend variations on these capabilities to commercial customers over
time.
The Company employs a highly trained N.E.T. service and support organization
in the U.S. and the U.K., including three Technical Assistance Centers ("TACs"),
and leverages 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 smaller organizations.
A high level of continuing customer service is integral to both the Company's
strategy of providing long-term support and developing long-term relationships
with customers and to its financial plans and performance. 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, Datacraft, other distributors or
third-party service organizations who are trained by and under contract with
N.E.T. Customers around the world can access one of N.E.T.'s three TACs, located
on east and west coasts of the U.S. and in the U.K. TAC support is fee-based,
staffed year-round and available 24 hours a day. TAC engineers provide
assistance over the telephone or, when authorized, by dialing into clients'
networks. N.E.T. products are generally sold with limited warranties on
equipment and software ranging in length from 90 days to one year 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.
As the Company adds OEM products to its portfolio with different price points
and service options from those typical of N.E.T., the service organization will
need to adapt to the change in product mix and different warranty and service
terms and conditions will be developed and offered to customers. A significant
amount of the Company's revenues and profits are generated by its service and
support offerings. There can be no assurance that customer acceptance of such
current and future offerings will be maintained or achieved. If it is not, the
Company's operating results could be materially and adversely affected.
RESEARCH AND DEVELOPMENT
N.E.T. engages in research and development ("R&D") to develop new products
and enhancements to existing products as technology and the Company's
performance permits and as markets evolve. N.E.T.'s development efforts are
focused on N.E.T.'s strategic market segments, providing multiservice platforms
for information-intensive enterprises and carriers worldwide. Product
development priorities include those intended to enable N.E.T. to occupy a
leadership position in the ATM WAN solutions market; 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 market new products that satisfactorily meet market
needs. There can be no assurance that N.E.T.'s product development efforts will
result in commercially successful products, that N.E.T.'s products will not be
rendered obsolete by changing technology, or that recently announced or
available products will be successful.
Research and development expense increased by $2.5 million (7.4%) in fiscal
year 1996 to a total of $36.4 million, from $33.9 million in fiscal year 1995.
The increase in R&D expense in fiscal 1996 was due to an increase in direct
project funding, primarily salary-related expenses and purchases of hardware and
software tools to support product development. The Company's R&D expense as a
percentage of total revenue decreased to 10.8% in fiscal 1996 from 12.0% in
fiscal 1995. In addition, $1.9 million, $2.0 million and $2.7 million in fiscal
1996, 1995 and 1994, respectively, of software production costs were capitalized
and have since been partially amortized or written-down to net
9
<PAGE>
realizable value. For further information on accounting policies relating to
software production costs, please refer to Note 1 in the "Notes to Consolidated
Financial Statements" in the Company's 1996 Annual Report filed as Exhibit 12.1
to this report. Management plans to continue funding R&D efforts at levels
necessary to advance product programs and expects R&D spending to increase in
fiscal 1997, while remaining fairly constant as a percentage of planned revenue.
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, but availability
limitations could adversely affect operating results. The Company's products
include components, assemblies and subassemblies that are currently available
from single sources and, in some cases, are in short supply. Although N.E.T.
believes alternative sources or substitutes for most of such single-sourced
items are available or, in most cases, could be developed if necessary, any
delay or difficulties in developing such alternatives or substitutes could
result in shipment delays and could adversely affect operating results. The
N.E.T. manufacturing process consists of the production of mechanical and
electrical subassemblies 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 revenue, margins and 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. This includes activities to improve the quality of supplied
components, subassemblies and internal company 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 canceled, although in certain circumstances a charge may be assessed upon
rescheduling or cancellation. Because of this and other factors, including the
Company's generally short delivery cycle, as noted above, N.E.T. does not
believe that backlog at any specific time is indicative of actual revenues that
will be recognized in any succeeding period.
COMPETITION
The communications industry in general, including the specific segments
within which N.E.T. competes, is intensely competitive and is characterized by
advances in technology that frequently result in the introduction of new
products and services with improved performance characteristics. The Company
believes that the principal competitive factors in its target markets are
product capabilities, including efficient multiservice bandwidth management and
standards compliance, technical services and support, quality and reliability,
vendor reputation and long-term prospects, distribution capabilities and price.
The Company believes that it currently competes favorably with respect to many
of these factors. However, many of the Company's current and potential
competitors have
10
<PAGE>
greater name recognition, a larger installed base of networking products, more
extensive engineering, manufacturing, marketing, distribution and support
capabilities in addition to greater financial, technological and personnel
resources. Failure to keep pace with technological advances or other competitive
factors would adversely affect the Company's competitive position and could
adversely affect N.E.T.'s future revenue levels and operating results.
In both the public and enterprise communications markets, the Company
competes with other WAN communications equipment vendors. With respect to
multiservice platforms and related services, including internetworking,
frame-relay and fast packet-based implementations, N.E.T. competes directly with
products and services from vendors such as Ascom Timeplex, Cascade
Communications, General DataComm, Newbridge Networks, Nortel and StrataCom.
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. In the WAN segment of the ATM marketplace,
the Company expects to continue to compete with the equipment vendors listed
above. Many other vendors have introduced, or announced plans to develop, ATM
networking equipment for WANs, resulting in very intense competition in the
markets that will be addressed by N.E.T.'s ATM products and services.
N.E.T.'s enterprise WAN solutions compete with certain public carrier
network services and VANs. Most of these carriers enjoy substantially greater
marketing resources and customer recognition than the Company.
IBM and Ericsson are not prohibited by their Agreements 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 either
entity announced the availability of or successfully introduced such products or
services.
As discussed below under "Government Regulation", in the United States the
Telecommunications Act of 1996 removes restrictions that had been imposed on the
Regional Bell Operating Companies ("RBOCs") by the AT&T divestiture decree thus
allowing them, under certain conditions, to manufacture telecommunications
equipment or customer premises equipment. Competition from carriers that decide
to manufacture such equipment, with their far greater resources and large
customer bases, 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
effect on the Company's operating results and financial condition.
GOVERNMENT REGULATION
The telecommunications industry is regulated by governments around the
world. The details and extent of regulation and progress of deregulation vary on
a state, country or regional basis, but there is generally a long-term trend
towards deregulation. 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
carriers' competitive offerings 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).
In February 1996 the Telecommunications Act of 1996 ( "the 1996 Legislation"
) became law. This is the first major change in U.S. telecommunications law
since the Communications Act of 1934. This far-reaching legislation will
influence the U.S. telecommunications industry in many ways. Certain changes
could have a direct impact on N.E.T.'s business. For example, the 1996
Legislation removes restrictions on RBOC activities that had been imposed in the
AT&T divestiture decree. Now, under certain conditions, the RBOCs may be
permitted to manufacture telecommunications equipment or customer premises
equipment. If any RBOCs manufacture or form alliances with other
11
<PAGE>
manufacturers to develop such equipment, N.E.T. could be materially and
adversely affected by direct competition with the RBOCs. However, the Company
expects that the 1996 Legislation is also likely to increase demand for certain
network services and equipment.
In addition, N.E.T. customers usually use carrier network services, the
rates and terms of which are subject to varying degrees of public utility-type
government regulation. In the U.S., decisions at the federal and state level
have, in some instances, provided certain 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, many international telecommunications markets are undergoing, and
are impacted by, deregulation. The regulatory policies of foreign governments
and regulatory bodies may affect the demand for N.E.T.'s products and the
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 public telecommunications operators ("PTOs") in Europe
to adopt or offer certain transmission services and behaviors. These changes
might significantly affect the demand for or usability of enterprise network
solutions which N.E.T. provides.
The Federal Communications Commission ("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).
PROPRIETARY RIGHTS AND LICENSES
N.E.T. has obtained patents in the United States and other countries on
inventions relating to its products and has applied for others. While possession
of patents, copyrights and trade secrets 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. N.E.T. is
aware that the laws of some other countries do not protect proprietary rights to
the same extent as the laws of the United States.
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.
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.
12
<PAGE>
EMPLOYEES
As of March 31, 1996, the Company had 1,318 employees. Of the Company's
total employees, 154 were in Finance and Administration, 256 were in Engineering
and Research and Development, 254 were in Field Service and Training, 159 were
in Marketing, 340 were in Sales and 155 were in Manufacturing and Quality
Assurance. None of the Company's domestic employees are represented by a
collective bargaining agreement. Certain of the Company's employees outside the
United States are governed by national collective bargaining or similar
agreements. 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, China, France,
Germany, Norway, Uruguay and the United Kingdom. The Company believes that its
current and planned 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"). Certain adjustments previously proposed by the IRS which related
substantially to the timing (years) of tax deductions have been resolved in the
Company's favor. In the opinion of management, any adjustments that may result
from the ultimate resolution of any remaining matters will not have a material
effect on the Company's financial condition or results of operations.
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, 1996, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Roger A. Barney 56 Vice President, Human Resources and Corporate Services
Jerry L. Davis 48 Vice President, Client Support
James B. De Golia 46 Vice President, General Counsel and Assistant Corporate
Secretary
Samuel H. Ezekiel 52 Vice President, Marketing
J. Robert Forkish 43 Vice President and Chief Technology Officer
Joseph J. Francesconi 53 President, Chief Executive Officer and Director
Craig M. Gentner 49 Senior Vice President, Chief Financial Officer and Corporate
Secretary
David P. Owen 55 Vice President, Corporate Development and Strategy
Raymond E. Peverell 48 Senior Vice President, Sales and Support
G. Michael Schumacher 57 Senior Vice President, Engineering and Operations
Charles S. Shiverick 52 Vice President, Information Services and Re-engineering
</TABLE>
13
<PAGE>
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 Client Support. Prior to
N.E.T., Mr. Davis was the National Service Manager for International Remote
Imaging Systems where he developed their service operations.
James B. De Golia joined the Company in December 1988 and has served as its
General Counsel and Assistant Secretary since 1991. From 1982 to 1988 Mr. De
Golia served as Corporate Counsel to a number of high technology and federal
divisions and subsidiaries of Xerox Corporation. Prior to joining Xerox, he
practiced law with the San Francisco office of Thelen, Marrin, Johnson &
Bridges.
Samuel H. Ezekiel joined the Company in June 1996 as Vice President of
Marketing. From 1991 until joining N.E.T., Mr. Ezekiel was Vice President of
Acquisitions & Alliances at Amdahl Corporation, and from 1980 to 1991 he served
as Vice President and General Manager of the Communications Products Division.
Prior to that, he held a number of sales management, marketing, and business
development positions with companies such as British Telecom, Sperry Univac,
Computer Communications, Inc. and IBM/Rolm.
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.
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 Director, Strategy and
Marketing. In 1992 he became Vice President of Corporate Marketing, 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. Mr. Owen spent 15 years at Control Data in a
variety of product strategy, architecture and software development positions.
Raymond E. Peverell joined the Company in 1993 as Senior Vice President of
Worldwide Sales, and in 1996 became Senior Vice President of Sales and Support.
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 and Operations,
joined the Company in January 1995. Prior to joining the Company, Mr. Schumacher
was Vice President and General
14
<PAGE>
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 Information Services and
Reengineering, joined the Company in 1989. Mr. Shiverick has held various senior
management positions including Senior Director of Corporate Quality and Vice
President of Operations. Prior to 1989, 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 35 of the
Registrant's 1996 Annual Report and is incorporated herein by reference. At
March 31, 1996, there were 774 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 14 of the Registrant's 1996
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 15 through 20 of the
Registrant's 1996 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
14 of the Registrant's 1996 Annual Report and the "Consolidated Financial
Statements" and "Independent Auditors' Report" thereon at pages 21 to 34 of the
Registrant's 1996 Annual Report.
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.
15
<PAGE>
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 contained 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 Schedules at page 20 of this Report.
(2) Financial Statement Schedules -- See Index to Financial Statements
and Financial Statement Schedules 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, 1996.
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION NOTE
- ----------- --------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
3.1 Registrant's Restated Certificate of Incorporation, as amended. n.1
3.2 Registrant's Bylaws, as amended. n.1
4.1 Indenture dated as of May 15, 1989, between Registrant and Morgan Guaranty Trust Company of
New York. n.4
4.2 Rights Agreement dated as of August 15, 1989, between Registrant and The First National Bank
of Boston, as amended. n.6
4.3 Certificate of Designations of Series A Junior Participating Preferred Stock filed with the
Secretary of State of Delaware on August 24, 1989. (Exhibit 4.1 in the Registrant's Form S-8
Registration Statement.) n.5
10.2 Seaport Centre Phase Three Industrial Net Lease Agreement, dated August 12, 1987, between
Registrant and Lincoln Property N.C., Inc. n.2
10.7 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Joseph J. Francesconi.*
10.8 Officer Employment and Continuation Agreement dated October 30, 1995, between Registrant and
Raymond E. Peverell.*
10.9 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
G. Michael Schumacher.*
10.10 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Craig M. Gentner.*
10.11 Officer Employment and Continuation Agreement dated October 27, 1995, between Registrant and
Roger A. Barney.*
10.12 Employment Agreement dated October 5, 1994, between Registrant and Walter J. Gill.*
10.13 Form of Officer Employment and Continuation Agreement as signed by all other Executive
Officers of the Company in October 1995.*
10.14 Form of Director Indemnification Agreement as signed by all Directors of the Company.
10.15 Form of Officer Indemnification Agreement as signed by all Executive Officers of the
Company.*
10.16 Corporate Director Compensation Deferral Election Program and 1996 Deferral Form.
10.17 Corporate Officer Compensation Deferral Election Program and 1996 Deferral Form.*
10.18 Corporate Officers Long Term Variable Compensation Program.*
11.1 Statement Regarding Computation of Per Share Income.
13.1 1996 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.)
16.1 Registrant's Registration of Form S-8. n.10
21.1 Subsidiaries of Registrant as of June 1, 1996.
23.1 Independent Auditors' Consent.
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, as amended.* n.10
</TABLE>
- ------------------------
* A management contract or compensatory plan required to be filed as an Exhibit
to Form 10-K.
17
<PAGE>
NOTES
(1) Incorporated by reference from the corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Form 10-Q (Commission File No. 0-15323) for the fiscal quarter
ended December 24, 1995, originally filed with the Securities and Exchange
Commission on February 7, 1996.
(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 corresponding Exhibit (or the Exhibit
identified in parentheses) previously filed as an Exhibit in the
Registrant's Registration Statement on Form S-8 (No. 33-65157) filed with
the Securities and Exchange Commission on December 19, 1995.
18
<PAGE>
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, 1996 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
- ---------------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
/S/ JOSEPH J. FRANCESCONI
- ------------------------------------
Joseph J. Francesconi President, Chief Executive Officer and June 21, 1996
Director (Principal Executive Officer)
/S/ JOHN B. ARNOLD
- ------------------------------------
John B. Arnold Chairman of the Board June 21, 1996
/S/ DIXON R. DOLL
- ------------------------------------
Dixon R. Doll Director June 21, 1996
/S/ JAMES K. DUTTON
- ------------------------------------
James K. Dutton Director June 21, 1996
/S/ CRAIG M. GENTNER
- ------------------------------------
Craig M. Gentner Senior Vice President, Chief Financial Officer June 21, 1996
and Corporate Secretary (Principal Financial
Officer and Principal Accounting Officer)
/S/ WALTER J. GILL
- ------------------------------------
Walter J. Gill Director June 21, 1996
/S/ FRANK S. VIGILANTE
- ------------------------------------
Frank S. Vigilante Director June 21, 1996
/S/ HANS A. WOLF
- ------------------------------------
Hans A. Wolf Director June 21, 1996
</TABLE>
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheets as of March 31, 1996 and 1995........................................ *
Consolidated Statements of Operations for the years ended March 31, 1996, 1995 and 1994.......... *
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994.......... *
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996, 1995 and
1994............................................................................................ *
Notes to Consolidated Financial Statements....................................................... *
Independent Auditors' Report..................................................................... *
</TABLE>
- ------------------------
* Incorporated herein by reference from information contained on pages 21
through 34 of the Registrant's 1996 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, 1996.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Network Equipment Technologies, Inc.:
We have audited the consolidated financial statements of Network Equipment
Technologies, Inc. and subsidiaries as of March 31, 1996 and 1995, and for each
of the three years in the period ended March 31, 1996, and have issued our
report thereon dated April 15, 1996; such financial statements and report are
included in your 1996 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 15, 1996
21
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTION/ END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE OFF OF PERIOD
- -------------------------------------------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
For the year ended March 31, 1996:
Accounts receivable allowances.................. $ 2,514 -- $ 4,615(1) $ (2,596) $ 4,533
</TABLE>
- ------------------------
(1) Amount represents additions to accounts receivable allowances which were
charged primarily to revenue.
S-1
<PAGE>
EXHIBIT 10.7
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Joseph J. Francesconi
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Joseph J. Francesconi
------------------------ ------------------------------
(Signature)
TITLE:
---------------------
<PAGE>
EXHIBIT 10.7
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Joseph J. Francesconi
TECHNOLOGIES, INC. -------------------------------
(Print Name of Officer)
BY: /s/ Craig M. Gentner /s/ Joseph J. Francesconi
--------------------------- -------------------------------
(Signature)
TITLE: SR VP + CFO
------------------------
<PAGE>
EXHIBIT 10.8
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using
the mid-point of the applicable range and the company "meets
plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock
awards during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 30th day of October, 1995.
NETWORK EQUIPMENT Raymond E. Peverell
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Raymond E. Peverell
-------------------------- ------------------------------
(Signature)
TITLE:
-----------------------
<PAGE>
EXHIBIT 10.8
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using
the mid-point of the applicable range and the company "meets
plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock
awards during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 30th day of October, 1995.
NETWORK EQUIPMENT Raymond E. Peverell
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Joseph J. Francesconi /s/ Raymond E. Peverell
--------------------------- -------------------------------
(Signature)
TITLE: PRESIDENT & CEO
-----------------------
<PAGE>
EXHIBIT 10.9
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Gerald M. Schumacher
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Gerald M. Schumacher
-------------------------- ------------------------------
(Signature)
TITLE:
-----------------------
<PAGE>
EXHIBIT 10.9
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Gerald M. Schumacher
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /S/ JOSEPH J. FRANCESCONI /s/ Gerald M. Schumacher
--------------------------- ------------------------------
(Signature)
TITLE: PRESIDENT + CEO
-----------------------
<PAGE>
EXHIBIT 10.10
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the mid-
point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Craig M. Gentner
TECHNOLOGIES, INC. ----------------------
(Print Name of Officer)
BY: /s/ Craig M. Gentner
---------------------- ---------------------
(Signature)
TITLE:
-------------------
<PAGE>
EXHIBIT 10.10
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the mid-
point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance during
the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Craig M. Gentner
TECHNOLOGIES, INC. ----------------------
(Print Name of Officer)
BY: /s/ Joseph J. Francesconi /s/ Craig M. Gentner
--------------------------- ---------------------
(Signature)
TITLE: PRESIDENT & CEO
----------------
<PAGE>
EXHIBIT 10.11
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Roger A. Barney
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Roger A. Barney
-------------------------- ------------------------------
(Signature)
TITLE:
-----------------------
<PAGE>
EXHIBIT 10.11
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this 27th day of October, 1995.
NETWORK EQUIPMENT Roger A. Barney
TECHNOLOGIES, INC. ------------------------------
(Print Name of Officer)
BY: /s/ Joseph J. Francesconi /s/ Roger A. Barney
--------------------------- ------------------------------
(Signature)
TITLE: PRESIDENT & CEO
-----------------------
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
between
WALTER J. GILL and NETWORK EQUIPMENT TECHNOLOGIES, INC.
This is an Agreement (the "Agreement") between NETWORK EQUIPMENT TECHNOLOGIES,
INC., located at 800 Saginaw Drive, Redwood City, California 94063, on behalf of
itself and its successors, officers, directors, employees, subsidiaries and
affiliates (collectively referred to as the "Company" or "N.E.T."); and Walter
J. Gill, on behalf of himself, his representatives, heirs, and any successors,
partnerships, owned or controlled corporations (collectively referred to as the
"Gill").
Whereas, Walter J. Gill has been and continues to be a substantial contributor
to N.E.T.'s success and possesses knowledge, information, contacts and skills
concerning N.E.T.'s business and its current and prospective markets, all of
which are and will continue to be of significant benefit to N.E.T.
Now, therefore, the parties agree as follows:
1. FULL-TIME EMPLOYMENT. Walter J. Gill will continue to serve in the
capacity of a Vice President & Chief Technology Officer, working an average of
three (3) days per week, and as a member of the Board of Directors of the
Company through October 6, 1994. During the above time period, Gill's primary
responsibilities shall be to be available to the C.E.O. or his designee for
assignments and to provide advice concerning, among other things, corporate and
product architecture and technology, business development activities, activities
concerning business with the Federal Government. Subject to Gill performing the
responsibilities set forth in this Paragraph and such other reasonable
responsibilities as they are assigned by the C.E.O. or his designees, Gill shall
be compensated by the Company at 60% of his current base salary.
2. PART-TIME EMPLOYMENT. For a period of up to sixty (60) months after
October 6, 1994, Gill shall provide services to N.E.T. as a part-time employee
for up to an average of twenty (20) hours per month at reasonable times and
places as requested by N.E.T. ("Employment Period"). Duties during the
Employment Period shall be as specified or requested by the C.E.O. or his
designee. During the Employment Period, Gill shall receive all then standard
N.E.T. employee medical and dental coverage, group life and disability insurance
coverage, subject to applicable standard terms and conditions (collectively
these four elements are "Employee Benefits"). However, if Gill becomes eligible
for one or more elements of employee benefits coverage under one or more plans
provided by another employer, then N.E.T. may discontinue providing coverage for
such elements. During the Employment Period, except as expressly provided in
this Agreement, Gill shall not accrue vacation, holiday or sick leave nor shall
he participate in or be eligible for any incentive or bonus program offered by
the Company, nor shall he receive additional stock options or consideration of
any type or amount either as an employee or as a member of the Board of
Directors. During the Employment Period and subject to the provisions of this
Agreement, Gill agrees to consistently engage in conduct that is supportive of
N.E.T. and is not injurious to or in conflict with a material interest of
N.E.T. In addition to the benefits set forth above, N.E.T. shall continue to
pay premiums of up to $3,107.04 per year on the existing
<PAGE>
Northwest Mutual Life Insurance Policies (Nos. 12-165-521 and 12250625) while
Gill is employed by N.E.T, but in no event beyond October 6, 1999. Gill shall
be responsible for all other premium payments. Prior to December 31, 1999, Gill
shall be entitled to purchase from the Company Life Insurance Policy No.
12250625 for a purchase price equal to the then current cash value of such
policy, after which the Company shall assign all right, title and interest in
such policy to Gill.
In consideration of Gill's agreements and commitments contained in this
Agreement, N.E.T. shall pay to Gill on a bi-weekly basis $7,000 per month from
October 7, 1994 through October 6, 1996 and $3,500 per month from October 7,
1996 through October 6, 1999 (all payments shall be less deductions for taxes
and other deductions that have been historically taken from his pay
("deductions")). In addition, N.E.T. will reimburse Gill for any out-of-pocket
expenses which he incurs in performing such activities including but not limited
to travel expenses (except commuting between home and N.E.T.) consistent with
Company policy as in effect from time to time. While employed by N.E.T., Gill
shall be eligible to continue to participate in or contribute to his 401(k)
account, subject to applicable law. N.E.T. will take all reasonable actions to
assist Gill in continuing his benefit coverage as an individual as required by
law and the Company's Plan Documents at that point in time upon termination of
the Employment Period. In the event that Gill secures employment or enters into
a consulting or similar relationship with one or more entities or persons
(collectively "Other Employment") during the Employment Period, he shall
immediately inform the Vice President of Human Resources of N.E.T. If in the
reasonable opinion of N.E.T. such Other Employment significantly impairs Gill's
ability to provide services under this Agreement, his entitlement to receive
monetary consideration under this Paragraph 2 may be reduced by N.E.T. on a
dollar for dollar basis commencing thirty (30) days after commencement of such
Other Employment.
Notwithstanding any other provisions in the Agreement, N.E.T. retains the right
to cease providing compensation and/or Employee Benefits or life insurance
coverage under this Agreement in the event of a material breach of this
agreement by Gill or a termination of the employer/employee relationship by
N.E.T. for good cause. Termination shall be "for good cause" if, in the
reasonable judgment of N.E.T.: (i) Gill engages in any act or omission which is
in bad faith and to the detriment of N.E.T.; (ii) Gill refuses or fails to act
in accordance with any direction or order of N.E.T.; (iii) Gill exhibits
unfitness or unavailability for service (due to other than disability),
misconduct, dishonesty, repeated or habitual neglect, persistent or serious
deficiencies in performance, or gross incompetence; (iv) Gill is convicted of a
crime; or (v) Gill materially breaches this Agreement or other obligations or
duties imposed by law.
All Compensation, Employee Benefits and option vesting shall immediately cease
if this Agreement or the employee/employer relationship is terminated in
accordance with Company policies or by Gill for any reason. In addition, N.E.T.
reserves the right to terminate the employer/employee relationship between it
and Gill at any time after October 6, 1994 with or without cause and for any
reason whatsoever. In the event any such termination is without cause and is
not related to a breach of this Agreement, N.E.T. will either (a) retain Gill as
a consultant and pay him a retainer equal to the monthly payments and Employee
Benefits provided under this Agreement or (b) pay to Gill the present cash value
of all sums that would be due under this Agreement as compensation to Gill as an
employee, such payment at Gill's option to be either in the form of a lump sum
or in equal payments once a year through October 6, 1999. In the event that
N.E.T. exercises its termination rights under this paragraph, and such
termination was other than for cause or breach of this Agreement, it shall
continue to provide Employee Benefits substantially equivalent to those provided
by N.E.T. to employees through the end of the Employment Period, except as
otherwise expressly provided in this Agreement.
3. STOCK OPTIONS. Gill's Stock Options shall continue to vest through October
6, 1994 and, thereafter, through the end of any Employment Period or consulting
period and shall be
<PAGE>
exercisable in accordance with the terms of the applicable Stock Option Plan
documents and the Stock Option Agreements. In the event of a change in control
of N.E.T., which, under the terms of the Company's stock option plans and Gill's
stock option agreements or as a result of Board action, causes an acceleration
of the vesting date of stock options held by continuing executives of the
Company, the Company agrees that any such favorable vesting provisions or
acceleration applicable to such other executives of the Company will also apply
to the options held by Gill on the same terms and conditions as those applicable
to the options held by the continuing executives of the Company.
4. NON-COMPETITION. During the Employment Period Gill shall not, without the
prior written consent of N.E.T. which N.E.T. may, in its sole discretion
withhold,, provide any services to any third party that assists such third party
in designing, marketing or selling products which provide or are targeted to
provide material competition with the N.E.T. Wide Area Networking products (i.e.
existing or planned IDNX, ADNX, STM and SPX) or N.E.T. ATM products or other
products that N.E.T. makes or markets during such period. The parties agree
that this Paragraph constitutes a material provision of this Agreement.
5. OTHER AGREEMENTS. Notwithstanding any other provision herein, nothing in
this Agreement shall affect the rights or obligations of the parties under their
Stock Option Agreements; INDEMNIFICATION AGREEMENT, effective January 27, 1994
or the employee PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT signed on April
7, 1989. Gill represents and warrants that he has complied and will continue to
comply with all terms of such agreements and applicable Company policies during
the period in which Gill has served and will serve as an employee and during the
period in which he has agreed to provide consulting services to N.E.T. and
thereafter in accordance with its terms of such agreements. Nothing in this
Agreement is intended to affect Gill's rights under N.E.T.'s D&O insurance
policies for any actions he undertook or which in the future he undertakes as a
director and/or officer of N.E.T. or any of its subsidiaries.
6. TAXES. Gill shall be treated as an employee for tax withholding, reporting
and payment purposes while he is an employee. Except for such employment
related taxes owed by N.E.T., Gill shall be solely and personally responsible
for all taxes owed as a result of compensation or other consideration received
pursuant to this Agreement.
7. RELEASE AND LEGAL MATTERS. Gill hereby releases N.E.T. and its
shareholders, officers, directors, employees, agents, subsidiaries, attorneys,
insurers, legal successors and assigns (collectively referred to as "N.E.T.")
from any and all claims against N.E.T., known and unknown, suspected or
unsuspected which he now has, owns or holds or at any timer heretofore ever had,
owned or held or could, shall or may hereafter have, own or hold based upon or
arising out of any matter, cause, fact, thing, act or omission whatsoever,
including without limitation, any and all claims which Gill now has or ever has
had or ever in the future may have based on his employment with or his service
as an officer or Director of the Company or the compensation for reducing his
employment to part-time or for termination of his officer status, occurring or
existing at any time to and including the date hereof, including without
limitation, claims of emotional distress, defamation, breach of contract, breach
of covenant of good faith and fair dealing, violation of provisions of the
California Labor Code and the Age Discrimination in Employment Act of 1967, the
Employee Retirement Income Security Act, and any other laws or regulations
relating to employment. Gill represents that he is aware of all of the facts
that are material to his decision to make this waiver and release.
Gill acknowledges that he is waiving and releasing any rights he may have under
the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver
and release is knowing and voluntary. Gill and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the effective date of this Release Agreement. Gill
<PAGE>
acknowledges that the consideration given for this waiver and release is in
addition to anything of value to which Gill was already entitled. Gill fully
acknowledges that he has been advised that (a) he should consult with an
attorney PRIOR to executing this Release Agreement; (b) he has had at least
twenty-one (21) days within which to consider this Release Agreement; (c) he has
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.
Gill represents that he is not aware of any claim in which he has an interest or
which is held or owned (in whole or in part) by him against the Company other
than the claims that are released by this Release Agreement. Gill acknowledges
that he is familiar with the provisions of California Civil Code Section 1542,
which 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.
Being aware of said Code Section, Gill agrees to expressly waive any rights he
may have thereunder, as well as under any other statute or common law principles
of similar effect, concerning the claims released in this Agreement.
N.E.T. is not aware of any claim, that it presently has against Gill arising
from or relating to his employment with N.E.T. ("CLAIM"). Furthermore, N.E.T.
shall not assert any Claim against Gill arising out of or relating to actions
taken by Gill within the scope of his employment. At N.E.T.'s request at any
time (or multiple times) prior to December 31, 1999, Gill agrees to execute a
release in a form substantially equivalent to that contained in Exhibit A to
this Agreement. Gill understands and agrees that any right he has to receipt of
consideration or Employee Benefits of any type provided under this Agreement and
any obligation that N.E.T. may have to provide consideration or Employee
Benefits to him is contingent upon his prompt execution of such Release when
requested by N.E.T. This Paragraph 7 and its representations and releases are
material provisions of this Agreement.
8. CORPORATE MATTERS. Effective October 6, 1994, Gill hereby resigns from his
position as Vice President and Chief Technology Officer at N.E.T. and resigns
from all Officer positions at N.E.T. and from all Board and Officer positions of
N.E.T.'s subsidiaries except his position as director and Chairman of the Board
of N.E.T. Federal, Inc. It is anticipated that Gill shall continue to serve as
a member of the Board of Directors of Network Equipment Technologies, Inc. and
as a member of the Board of Directors of N.E.T. Federal, Inc. after October 6,
1994 until Gill decides to resign or is requested by N.E.T. to resign such
positions. Gill shall, at N.E.T.'s direction, promptly execute any documents
that N.E.T. reasonably requires to accomplish such resignations, including,
without limitation, completing and executing any transfers of stock in N.E.T.
subsidiaries and any approvals or any governmental filings directly or
indirectly related to such resignations or to accomplish the disengagement of
Gill from the active management of the business of N.E.T. and its subsidiaries.
9. CONFIDENTIALITY. Except as required by law, this Agreement and its terms
shall not be disclosed by Gill to any third parties (except for Gill's attorney)
or to any employees of the Company other than those who have a need to know
without the written consent of N.E.T. Provided, however, that (1) Gill shall be
entitled to disclose both the facts and terms of this Agreement to his spouse
and any other person to whom he is related by family, provided that Gill shall
be responsible for any breach of confidentiality by family members, and (2) Gill
shall be
<PAGE>
entitled to disclose to any person the fact that he resigned from N.E.T. under
terms which were acceptable to both parties and that he has a continuing
relationship with N.E.T. into the future.
10. NO SOLICITATION. Gill acknowledges that he has a continuing duty of
loyalty to N.E.T. while employed by or working as a consultant to N.E.T. and he
agrees that through the Employment Period (or, if sooner terminated by either
party for any reason, for one year after such termination), he shall not
encourage or solicit any employee of N.E.T. to leave N.E.T. for any reason or to
devote less than all of any such employee's efforts to the affairs of N.E.T.
The foregoing agreement not to encourage or solicit is a material provision of
this Agreement. For purposes of this Paragraph, Gill shall not be deemed to
have encouraged or solicited any employee of N.E.T. if Gill does not actively
participate in soliciting such employee or actively encourage such employee to
leave N.E.T. or if such employee has, prior to substantive discussions with
Gill, clearly and directly informed his/her management up to the Vice President
or General Manager level that he/she has decided to explore employment
opportunities outside N.E.T. or has decided to leave the employ of N.E.T.
11. COOPERATION AND NON-DISPARAGEMENT. N.E.T. and Gill shall 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 Gill's activities during the time
that Gill was employed by or serving as a consultant to N.E.T. Provided,
however, that if such cooperation is required (other than in response to a third
party subpoena) after the term of the Employment Period under Paragraph 2 or
results in his consulting with N.E.T. in excess of the hours set forth in
Paragraph 2, then such cooperation shall be (1) required only to the extent and
at times that it does not interfere with other employment or professional
activities which occupy Gill's time at the time of such cooperation and (2)
N.E.T. shall compensate Gill at a mutually agreed rate of $250 per hour for such
excess hours. Gill and N.E.T. will promptly advise the other of any formal or
informal request for information or cooperation that may concern or relate to
the interests of the other in connection with any such investigation or
litigation. The parties also agree not to disparage each other or their
products or services in the future. N.E.T. shall answer all inquiries about
Gill's employment and consulting at N.E.T. by providing only the dates of
employment and consulting and the positions Gill held during his tenure as
employee or consultant. Gill and N.E.T. agree that this Paragraph constitutes a
material provision of this Agreement.
12. GENERAL. Gill represents and warrants that, as of five days after the
termination of his employment with N.E.T., he will not have in his possession or
under his custody or control any records, documents, data, specifications,
drawings, reproductions, notes, reports, proposals, or copies of the foregoing
or other documents or material, equipment or other property belonging to N.E.T.
or any of its subsidiaries or employees (collectively "N.E.T. materials") other
than Macintosh IIX with keyboard, Serial No. F91015YM, N.E.T. Asset #010739; RGB
Color Monitor (13"), Serial No.5238669M0401, N.E.T. Asset #010738; Laserwriter
II NT, Serial No. CA904AL%M6000, N.E.T. Asset #010740; Okidata FAX600, Serial
No. 111948 (collectively "Equipment"). All of N.E.T.'s right, title and
interest in and to the items set forth on such Equipment and any applications
software loaded on such Equipment is hereby transferred and assigned to Gill
effective October 6, 1994. During the shorter of the Employment Period or the
term of this Agreement, Gill's phonemail box shall be maintained and available
for use by Gill. Except for entitlement to accrued vacation at the end of his
regular full-time employment (which will be paid on or about October 6, 1994)
and reimbursement under Company policies of reasonable expenses incurred in the
course of providing employment or consulting related services to the Company and
except as expressly set forth in this Agreement, Gill hereby waives any right to
any and all other compensation, including but not limited to salary, bonuses,
stock options or commissions. During the shorter of the Employment Period or
the term of this Agreement, Gill waives any right to Board Compensation or
Director Automatic Grants. The provisions hereof shall be binding on and shall
inure to the benefit of the parties hereto, their respective heirs, legal
representatives, successors and assigns. The provisions hereof shall be
severable and if any
<PAGE>
provisions other than those identified as material to this Agreement are held to
be invalid they shall be deemed omitted and the other shall nevertheless be
enforceable. This Agreement shall be construed and enforced in accordance with
and governed by the laws of the State of California as applied to contracts
executed in California between two residents of California.
13. DISPUTE RESOLUTION In the event of any dispute arising from or relating to
this Agreement, including but not limited to its formation, enforcement,
performance or breach of this Release but not including a request for injunctive
relief ("Dispute"), the parties agree that they shall pursue the dispute
resolution procedure set forth in this Paragraph 13. Any party which alleges
the existence of a Dispute shall give the other party written notice of same
stating the nature and basis of the Dispute which notice shall be delivered by
overnight service, personally or certified mail, return receipt requested.
Within thirty (30) days of the receipt of such notice, the parties shall submit
the Dispute to a non-binding mediation before a neutral mediator who shall be an
attorney with experience in corporate law and intellectual property ("attorney")
or such other person as to whom the parties agree. If the parties are unable to
agree on a mediator, then they shall each choose one attorney and the two so
chosen shall pick a mediator who shall alone act as the neutral. The parties
shall present their cases without discovery of any kind and the mediator shall
attempt to work with the parties to structure a resolution to the Dispute. The
parties shall negotiate in good faith to reach a resolution of the Dispute and
shall bear all mediation expenses equally. In the event that the parties are
unable to resolve the Dispute following mediation, the parties agree that the
Dispute shall be submitted to arbitration and that arbitration shall be the
exclusive remedy for resolution of the Dispute. The parties also agree that
this arbitration shall be held in Redwood City, California, and shall be in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); the arbitrator shall have the authority to award or grant
both legal, equitable and declaratory relief. Such arbitration shall be final
and binding on the parties and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. Finally,
the parties both agree that in the event that an arbitration is brought to
enforce this agreement, the prevailing party shall be entitled to an award of
all reasonable attorney's fees and legal costs, in addition to other relief.
14. ENTIRE AGREEMENT, ETC. This Agreement and any Exhibits hereto constitute
the entire agreement between N.E.T. and Gill with respect to the subject matter
hereof and supersedes all prior agreements, understandings and proposals,
whether written or oral concerning such subject matter. This Agreement may be
amended only in a writing signed by both parties. Nor oral statement of any
person will, in any manner or degree, modify or otherwise affect the terms and
provisions of this Agreement. In the event of a breach or alleged breach of
this Agreement, the prevailing party will be entitled to reasonable attorneys'
fees and other costs and expenses incurred in connection with the enforcement of
its rights under the provisions of this Agreement.
NETWORK EQUIPMENT TECHNOLOGIES, INC. WALTER J. GILL
By: /s/ Roger A. Barney By: /s/ Walter J. Gill
-------------------------- ---------------------------
Date: Oct 5, 1994 Date: Oct 5, 1994
------------------------ ------------------------
<PAGE>
EXHIBIT A TO GILL EMPLOYMENT AGREEMENT
RELEASE AGREEMENT
I, WALTER J. GILL, on behalf of myself, my representatives, heirs, legal
representatives, executors, administrators, successors, and assigns,
(hereinafter collectively referred to as the "Executive"), 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 the "Company"), agree as follows:
1. RELEASE OF CLAIMS. Executive hereby releases N.E.T. and its shareholders,
officers, directors, employees, agents, subsidiaries, attorneys, insurers, legal
successors and assigns (collectively referred to as "N.E.T.") from any and all
claims against N.E.T., known and unknown, suspected or unsuspected which he now
has, owns or holds or at any timer heretofore ever had, owned or held or could,
shall or may hereafter have, own or hold based upon or arising out of any
matter, cause, fact, thing, act or omission whatsoever, including without
limitation, any and all claims which Executive now has or ever has had or ever
in the future may have based on his employment with or his service as an officer
or Director of the Company or the compensation for reducing his employment to
part-time or termination of his officer or Director status, occurring or
existing at any time to and including the date hereof, including without
limitation, claims of emotional distress, defamation, breach of contract, breach
of covenant of good faith and fair dealing, violation of provisions of the
California Labor Code and the Age Discrimination in Employment Act of 1967, the
Employee Retirement Income Security Act, and any other laws or regulations
relating to employment. Executive represents that he is aware of all of the
facts that are material to his decision to make this waiver and release.
2. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. The Executive acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Executive and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the effective date of this Release Agreement. Executive acknowledges
that the consideration given for this waiver and release is in addition to
anything of value to which Executive was already entitled. Executive fully
acknowledges that he has been advised that (a) he should consult with an
attorney PRIOR to executing this Release Agreement; (b) he has had at least
twenty-one (21) days within which to consider this Release Agreement; (c) he has
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.
3. CIVIL CODE SECTION 1542. The Executive represents that he is not aware of
any claim in which he has an interest or which is held or owned (in whole or in
part) by him against the Company other than the claims that are released by this
Release Agreement. Executive acknowledges that he is familiar with the
provisions of California Civil Code Section 1542, which 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.
<PAGE>
Being aware of said Code Section, Executive agrees to expressly waive any rights
he may have thereunder, as well as under any other statute or common law
principles of similar effect, concerning the claims released in this Agreement.
4. CONFIDENTIALITY. Executive and the Company agree to maintain in
confidence, the terms of this Release Agreement. Executive will take every
reasonable precaution to prevent disclosure of the terms of this Release
Agreement and agree not to take action directly or indirectly to publicize such
terms. The foregoing shall not prohibit either party from making accurate and
complete disclosures or statements in response to legal process or as may be
required by law, nor shall this provision require the making of any false or
misleading statements.
5. GENERAL. The parties' Agreement, which consists of the Employment
Agreement and documents and agreements referenced therein and this Release
Agreement, represents the entire Agreement and understanding between the Company
and Executive concerning Executive's employment with the Company or his service
or termination of his service as an employee, officer or Director. In the event
of a conflict between the Employment Agreement and any other Agreements, the
Employment Agreement shall control. Except as expressly referenced in the
Employment Agreement, all other agreements relating to the subject matter
hereof, are hereby terminated and shall be null and void. The Executive and the
Company agree to refrain from disparaging the other in the future. The
Agreement may only be amended in writing signed by Executive and the Company.
The Agreement shall be governed by the laws of the State of California. This
Release Agreement may be executed in counterparts, and each counterpart shall
have the same force and effect as the original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
IN WITNESS WHEREOF, the parties have executed this Release Agreement in
accordance with the terms of the Employment Agreement.
NETWORK EQUIPMENT WALTER J. GILL
TECHNOLOGIES, INC.
By: /s/ Roger A. Barney By /s/ Walter J. Gill
-------------------------- ---------------------------
Date: Oct 5, 1994 Date: Oct 5, 1994
------------------------ -------------------------
<PAGE>
EXHIBIT 10.13
OFFICER EMPLOYMENT CONTINUATION AGREEMENT
Network Equipment Technologies, Inc. ("the Company") and the undersigned
("Officer"), in partial consideration for their continuing officer and
employment relationship and to encourage continued employment in the event of a
potential Change of Control, agree as follows:
1. In the event of Termination of Employment of Officer resulting from a
Corporate Transaction, Change of Control or Hostile Take-Over (as those terms
are defined in the 1993 Stock Option Plan, collectively referred to in this
Agreement as "Change of Control") or from involuntary termination for reasons
other than cause, the Company will provide severance benefits as follows:
a. one year of Officer's base salary ("salary continuance"),
b. one year of Officer's variable compensation (computed using the
mid-point of the applicable range and the company "meets plan"),
c. Officer level medical, dental, life and disability insurance
during the period of salary continuance, and
d. vesting of outstanding stock options and restricted stock awards
during the period of salary continuance.
2. "Termination of Employment" of Officer occurs when one of the following
occurs: he or she is terminated without cause, job location is changed more than
50 miles, his or her compensation is materially reduced or responsibilities are
substantially altered or reduced (without express consent of the employee) by
the Company, or by any successor to the Company in conjunction with or within
one year after the close of a Change of Control.
3. In the event of a Termination Of Employment in conjunction with a Change of
Control, then vesting of outstanding stock options and restricted stock held by
Officer shall accelerate at the time of such Termination. All vested options
shall be exercisable for the duration of the life of the option.
4. In order to receive the foregoing, Officer agrees to execute the Company's
release and non-competition agreement at the time of any such Termination of
Employment.
Agreed this ____ day of __________________, 1995.
NETWORK EQUIPMENT ------------------------------
TECHNOLOGIES, INC. (Print Name of Officer)
BY:
-------------------------- ------------------------------
(Signature)
TITLE:
-----------------------
<PAGE>
EXHIBIT 10.14
DIRECTOR INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into as of the day of
, 199 between Network Equipment Technologies, Inc., a Delaware
corporation ("Corporation") and __________________ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors of
Corporation, performs a valuable service in such capacity for Corporation; and
WHEREAS, the stockholders of Corporation have adopted By-Laws (the
"By-Laws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended ("Law"); and
WHEREAS, such By-Laws and the Law, by their non-exclusive nature,
permit contracts between Corporation and the members of its Board of Directors
and its Officers with respect to indemnification of such Directors and Officers;
and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors of Corporation, Corporation has determined and
agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a member of the Board of Directors after the date hereof, the parties hereto
agree as follows:
1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:
a. against any and all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by Indemnitee in connection with any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the Corporation) to which Indemnitee
is, was or at any time becomes a party, or is threatened to be made a party, by
reason of the fact that Indemnitee is, was or at any time becomes a director,
officer, employee or agent of Corporation, or is or was serving or at any time
serves at the request of Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise; and
b. otherwise to the fullest extent as may be provided to
Indemnitee by Corporation under the non-exclusivity provisions of Article VII,
Section 6 of the By-Laws of Corporation and the Law.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by Corporation:
a. except to the extent of the aggregate of losses to be
indemnified thereunder exceed the sum of $1,000 plus the amount of such losses
for which Indemnitee is
<PAGE>
indemnified either pursuant to Sections 1 and 2 hereof or pursuant to any D&O
Insurance purchased and maintained by the Corporation;
b. in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
c. on account of any suit in which judgment is rendered against
a Indemnitee for an accounting of profits made from the purchase or sale by
Indemnitee of securities of Corporation pursuant to the provision of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provision of any federal, state or local statutory law;
d. on account of Indemnitee's act or omission which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct;
e. on account of Indemnitee's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
f. on account of any action, claim or proceeding (other than a
proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors;
g. if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both Corporation and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1 and
2 is unavailable and may not be paid to Indemnitee for any reason other than
those set forth in paragraphs (b), (c), (d), (e) and (f) of Section 3, then in
respect of any threatened, pending or completed action, suit or proceeding in
which Corporation is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Corporation shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
such proportion as is appropriate to reflect (i) the relative benefits received
by Corporation on the one hand and Indemnitee on the other hand from the
transaction from which such action, suit or proceeding arose, and (ii) the
relative fault of Corporation on the one hand and of Indemnitee on the other in
connection with the events which resulted in such expenses, judgments, fines or
settlement amounts, as well as any other relevant equitable considerations. The
relative fault of Corporation on the one hand and of Indemnitee on the other
shall be determined by reference to, among other things, the Indemnitee's
relative intent, knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. Corporation and Indemnitee agree that it would not be just
and equitable if contribution pursuant to this Section 4 were determined by pro
rata allocation or any other method of allocation which does not take account of
the foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust,
2
<PAGE>
employee benefit plan or other enterprise) and shall continue thereafter so long
as Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was a Director of Corporation or serving
in any other capacity referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made
against Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission to so notify Corporation will not relieve it from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Indemnitee
notifies Corporation of the commencement thereof:
a. Corporation will be entitled to participate therein at its
own expense;
b. except as otherwise provided below, to the extent that it
may wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its
election so as to assume the defense thereof, Corporation will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from Corporation
of its assumption of the defense thereof shall be at the expense of Indemnitee
unless (i) the employment of counsel by Indemnitee has been authorized by
Corporation, (ii) if the counsel designated by the Corporation is also
representing the Corporation in the same matter and the Indemnitee shall have
reasonably concluded that there may be a conflict of interest between
Corporation and Indemnitee in the conduct of the defense of such action or (iii)
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of Indemnitee's
separate counsel shall be at the expense of Corporation. Corporation shall not
be entitled to assume the defense of any action, suit or proceeding brought by
or on behalf of Corporation or as to which Indemnitee shall have made the
conclusion provided for in (ii) above; and
c. Corporation shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Corporation shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither Corporation nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
a. In the event that Indemnitee employs his own counsel
pursuant to Section 6.b.(i) through (iii) above, the Corporation shall pay in
advance to Indemnitee, prior to any final disposition of any threatened or
pending action, suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding within thirty (30) days after receiving from Indemnitee copies of
invoices for such expenses.
b. Indemnitee agrees that he will repay the Corporation for all
reasonable expenses so advanced by the Corporation in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall
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be ultimately determined by a final decision (from which there is no right of
appeal) that Indemnitee is not entitled, as authorized by the provisions of the
Law, the By-Laws, this Agreement or otherwise, to be indemnified by the
Corporation for such expenses.
c. Notwithstanding the foregoing, Corporation shall not be
required to advance such expenses to Indemnitee if Indemnitee (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by Corporation and approved by a majority of
the Board which alleges willful misappropriation of corporate assets by
Indemnitee, disclosure of confidential information in violation of Indemnitee's
fiduciary or contractual obligations to Corporation, or any other willful and
deliberate breach of Indemnitee's duty to Corporation or its stockholders.
8. ENFORCEMENT.
a. Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on Corporation
hereby in order to induce Indemnitee to continue as a Director of Corporation,
and acknowledges that Indemnitee is relying upon this Agreement in continuing
such capacity.
b. In the event either party is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, such prevailing party shall be entitled to a judgment for
reasonable fees and expenses in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee
by this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or By-Laws, agreement, vote of stockholders or
directors, or otherwise, both as action in his official capacity and as to
action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of Corporation and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the
Corporation to indemnify the Indemnitee to the full extent provided by the By-
Laws or the Code.
13. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware.
14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee
and upon Corporation, its successors and assigns, and shall inure to the benefit
of Indemnitee, his heirs, personal representatives and assigns and to the
benefit of Corporation, its successors and assigns.
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15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
16. PRIOR INDEMNITY AGREEMENT. This Agreement shall supersede and
replace for all purposes any prior Agreement with respect to the same subject
matter entered into between the Corporation and the Indemnitee.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
By: _____________________________
Joseph J. Francesconi
President and Chief Executive Officer
ATTEST:
__________________________
Craig M. Gentner
Senior Vice President, Chief Financial Officer
and Corporate Secretary
INDEMNITEE:
__________________________________
(Name)
5
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EXHIBIT 10.15
OFFICER INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into as of the __________ day of
_____, 199__ between Network Equipment Technologies, Inc., a Delaware
corporation ("Corporation") and __________________ ("Indemnitee").
WHEREAS, Indemnitee, an Officer of Corporation, performs a valuable
service in such capacity for Corporation; and
WHEREAS, the stockholders of Corporation have adopted By-Laws (the
"By-Laws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended ("Law"); and
WHEREAS, such By-Laws and the Law, by their non-exclusive nature,
permit contracts between Corporation and its Officers with respect to
indemnification of such Officers; and
WHEREAS, in order to induce Indemnitee to continue to serve as an
Officer of Corporation, Corporation has determined and agreed to enter into this
contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an Officer after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 4 hereof, Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:
a. against any and all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by Indemnitee in connection with any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the Corporation) to which Indemnitee
is, was or at any time becomes a party, or is threatened to be made a party, by
reason of the fact that Indemnitee is, was or at any time becomes a director,
officer, employee or agent of Corporation, or is or was serving or at any time
serves at the request of Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise; and
b. otherwise to the fullest extent as may be provided to
Indemnitee by Corporation under the non-exclusivity provisions of Article VII,
Section 6 of the By-Laws of Corporation and the Law.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by Corporation:
a. except to the extent of the aggregate of losses to be
indemnified thereunder exceed the sum of $1,000 plus the amount of such losses
for which Indemnitee is indemnified either pursuant to Sections 1 and 2 hereof
or pursuant to any D&O Insurance purchased and maintained by the Corporation;
<PAGE>
b. in respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
c. on account of any suit in which judgment is rendered against
a Indemnitee for an accounting of profits made from the purchase or sale by
Indemnitee of securities of Corporation pursuant to the provision of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provision of any federal, state or local statutory law;
d. on account of Indemnitee's act or omission which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct;
e. on account of Indemnitee's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
f. on account of any action, claim or proceeding (other than a
proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors;
g. if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both Corporation and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1 and
2 is unavailable and may not be paid to Indemnitee for any reason other than
those set forth in paragraphs (b), (c), (d), (e) and (f) of Section 3, then in
respect of any threatened, pending or completed action, suit or proceeding in
which Corporation is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Corporation shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
such proportion as is appropriate to reflect (i) the relative benefits received
by Corporation on the one hand and Indemnitee on the other hand from the
transaction from which such action, suit or proceeding arose, and (ii) the
relative fault of Corporation on the one hand and of Indemnitee on the other in
connection with the events which resulted in such expenses, judgments, fines or
settlement amounts, as well as any other relevant equitable considerations. The
relative fault of Corporation on the one hand and of Indemnitee on the other
shall be determined by reference to, among other things, the Indemnitee's
relative intent, knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. Corporation and Indemnitee agree that it would not be just
and equitable if contribution pursuant to this Section 4 were determined by pro
rata allocation or any other method of allocation which does not take account of
the foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during the period Indemnitee is a
director, officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise) and shall continue thereafter so long as Indemnitee shall be subject
to any possible claim or threatened, pending or completed action, suit or
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<PAGE>
proceeding, whether civil, criminal or investigative, by reason of the fact that
Indemnitee was an Officer of Corporation or serving in any other capacity
referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made
against Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission to so notify Corporation will not relieve it from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Indemnitee
notifies Corporation of the commencement thereof:
a. Corporation will be entitled to participate therein at its
own expense;
b. except as otherwise provided below, to the extent that it
may wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its
election so as to assume the defense thereof, Corporation will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from Corporation
of its assumption of the defense thereof shall be at the expense of Indemnitee
unless (i) the employment of counsel by Indemnitee has been authorized by
Corporation, (ii) if the counsel designated by the Corporation is also
representing the Corporation in the same matter and the Indemnitee shall have
reasonably concluded that there may be a conflict of interest between
Corporation and Indemnitee in the conduct of the defense of such action or (iii)
Corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of Indemnitee's
separate counsel shall be at the expense of Corporation. Corporation shall not
be entitled to assume the defense of any action, suit or proceeding brought by
or on behalf of Corporation or as to which Indemnitee shall have made the
conclusion provided for in (ii) above; and
c. Corporation shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Corporation shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither Corporation nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
a. In the event that Indemnitee employs his own counsel
pursuant to Section 6.b.(i) through (iii) above, the Corporation shall pay in
advance to Indemnitee, prior to any final disposition of any threatened or
pending action, suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding within thirty (30) days after receiving from Indemnitee copies of
invoices for such expenses.
b. Indemnitee agrees that he will repay the Corporation for all
reasonable expenses so advanced by the Corporation in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall be ultimately determined by a final decision
(from which there is no right of appeal) that
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Indemnitee is not entitled, as authorized by the provisions of the Law, the By-
Laws, this Agreement or otherwise, to be indemnified by the Corporation for such
expenses.
c. Notwithstanding the foregoing, Corporation shall not be
required to advance such expenses to Indemnitee if Indemnitee (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board of Directors or (ii) is a party to an
action, suit or proceeding brought by Corporation and approved by a majority of
the Board which alleges willful misappropriation of corporate assets by
Indemnitee, disclosure of confidential information in violation of Indemnitee's
fiduciary or contractual obligations to Corporation, or any other willful and
deliberate breach of Indemnitee's duty to Corporation or its stockholders.
8. ENFORCEMENT.
a. Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on Corporation
hereby in order to induce Indemnitee to continue as an Officer of Corporation,
and acknowledges that Indemnitee is relying upon this Agreement in continuing
such capacity.
b. In the event either party is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, such prevailing party shall be entitled to a judgment for
reasonable fees and expenses in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee
by this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or By-Laws, agreement, vote of stockholders or
directors, or otherwise, both as action in his official capacity and as to
action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of Corporation and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable for any reason,
such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the
Corporation to indemnify the Indemnitee to the full extent provided by the By-
Laws or the Code.
13. GOVERNING LAW. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware.
14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee
and upon Corporation, its successors and assigns, and shall inure to the benefit
of Indemnitee, his heirs, personal representatives and assigns and to the
benefit of Corporation, its successors and assigns.
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15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
16. PRIOR INDEMNITY AGREEMENT. This Agreement shall supersede and
replace for all purposes any prior Agreement with respect to the same subject
matter entered into between the Corporation and the Indemnitee.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
NETWORK EQUIPMENT TECHNOLOGIES, INC.
By: _____________________________
Joseph J. Francesconi
President and Chief Executive Officer
ATTEST:
__________________________
Craig M. Gentner
Senior Vice President, Chief Financial Officer
and Corporate Secretary
INDEMNITEE:
__________________________________
(Name)
5
<PAGE>
EXHIBIT 10.16
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE DIRECTORS COMPENSATION DEFERRAL ELECTION PROGRAM
I. PURPOSE OF THE PROGRAM
This Corporate Directors Compensation Deferral Election Program
("Program") is intended to promote the interests of Network Equipment
Technologies, Inc., a Delaware corporation (the "Company"), by providing
Corporate Directors of the Company with the opportunity to participate in a
deferred compensation arrangement which will allow them to tailor the receipt of
their compensation to their own personal needs and thereby encourage them to
continue in the service of the Company.
II. ADMINISTRATION OF THE PROGRAM
The Program shall be administered by the Compensation Committee
("Committee") of the Company's Board of Directors (the "Board") and, consistent
with applicable law and the Company's By-laws, a Corporate Officer may be
designated to take all action and to execute and deliver all documents which
such officer may deem necessary or appropriate to carry out this Program. The
Committee shall have full authority to administer the Program, including the
authority to interpret and construe the provisions of the Program and to adopt
rules and regulations for administering the Program. Decisions of the Committee
shall be final and binding on all parties who have an interest in the Program.
For purposes of administration and interpretation, the following
definitions shall apply:
CHANGE IN - A change in Control shall be deemed to occur:
CONTROL
(i) on the first date that a person or related group
of persons, other than the Company or a person that
directly or indirectly controls, is controlled by or is
under common control with the Company, acquire
ownership of twenty-five percent (25%) or more of the
Company's outstanding voting stock pursuant to a tender
or exchange offer which the Board does not recommend
that the shareholders of the Company accept; or
(ii) on the first date within any period of twenty-four
(24) consecutive months or less on which there is
effected a change in the composition of the Board such
that a majority of the Board members (rounded
<PAGE>
up to the next whole number) ceases to be comprised of
individuals who either (A) have been members of the
Board continuously since the beginning of such period
or (B) have been elected or nominated for election as
Board members during such period by at least a majority
of the Board members described in clause (A) who were
still in office at the time such election or nomination
was approved by the Board.
CORPORATE
DIRECTOR - A Director of the Company, is elected by the
Company's Board of Directors to a position of Corporate
Director pursuant to Article V, Section 1 of the
Company's By-laws.
CORPORATE A Corporate Transaction shall be deemed to
TRANSACTION - occur in the event there is:
(i) a merger or consolidation of the Company in which
the Company is not the surviving entity, except for a
transaction the principal purpose of which is to change
the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in
liquidation or dissolution of the Company, or
(iii) any reverse merger in which the Company is
the surviving entity but in which securities possessing
more than fifty percent (50%) of the combined voting
power of the Company's outstanding securities are
transferred to holders different from those who held
such securities immediately prior to such merger.
EFFECTIVE
DATE - January 1, 1994.
PARTICIPANT - A Corporate Director and non-employee of the Company,
who has been designated as a Participant by the
Committee and who elects to participate in the
Corporate Directors Deferral Election Program.
COMPENSATION - The director's fees payable to each Corporate Director
determined by the Committee to be eligible for
participation under this Program, for serving as a
Board member, for attending meetings of the Board, and
for serving as chairman or member of a Board committee
for which fees are paid, but excluding
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reimbursable expenses under applicable Company
policies.
DEFERRED
COMPENSATION
ACCOUNT - An investment account reflecting Compensation deferred
by a Participant, which may (at the Company's
discretion) be established at a bank, brokerage or
similar financial institution for the sole purpose of
holding and investing Compensation that has been
deferred by the Participant.
SUBSIDIARY - Each corporation (other than the Company) in an
unbroken chain of corporations ending with the Company,
provided such corporation (other than the last
corporation in the chain) owns, at the time of
determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all the
classes of stock in one of the other corporations in
such chain.
YEAR OF
SERVICE - Any calendar year during which a Participant renders
services as a Corporate Director of the Company.
III. ELIGIBILITY;
DEFERRED COMPENSATION ELECTION
Only Corporate Directors designated as Participants by the Committee will
be eligible to participate in the program. Participants shall remain eligible to
defer Compensation pursuant to this Program until the EARLIEST to occur of (i)
of the Participants termination of Board service or (ii) the termination of the
Program.
Each Participant shall have the right to make an annual election to defer
the receipt of up to one hundred percent (100%) of the Participant's
Compensation earned by him/her for any Year of Service for which he/she is a
Participant in the Program. Any Compensation so deferred shall be paid in
accordance with the provisions of the Program.
Each deferral election shall be made in compliance with all of the
following requirements and shall not be effective unless such requirements are
met:
A. The election must be exercised be means of a written notice to
the Committee. The notice shall be in such form as the Committee deems
appropriate and must be delivered to the Committee or its designee prior to
the commencement date of the Year of Service for which the fee to be
earned.
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B. The amount deferred with respect to any Year of Service must be
made in increments of ten percent (10%).
C. The election, once made, shall be irrevocable with respect to the
Year of Service for which it is made.
IV. DEFERRED COMPENSATION ACCOUNT
PAYMENT OF DEFERRED COMPENSATION
The Company shall establish a Deferred Compensation Account for each
Participant who properly exercises a deferral election under the Program. Any
Compensation deferred by a Participant shall be credited to his/her Deferred
Compensation Account as of the date such Compensation would have otherwise
become payable in the absence of the Participant's deferral election.
The balance credited to each Deferred Compensation Account shall earn
an investment return over the deferral period in accordance with the following
provisions:
A. The Committee may in its discretion provide Participants with the
right to designate the particular investment funds or specific stocks,
securities or certificates of deposit. To the extent such investment
authority is provided, the following special guidelines shall be in effect:
(i) The Participant must file investment directives with respect
to his/her account balance in increments of twenty-five percent (25%), but
in any event in increments of no less than $5,000.
(ii) Investment directives may be filed at intervals no more
frequently than quarterly, and each investment directive shall remain in
effect for at least one full calendar quarter and may not be changed at
intervals more frequently than quarterly.
(iii) To the extent the Company invests assets of the Company
(which shall be held as general assets) in the specific investments
designated by the Participant, all expenses and charges incurred by the
Company or the Deferred Compensation Account in the acquisition of each
investment (including, without limitation, the purchase price and any
brokerage fees, commission or other front-end charges) and all income and
other taxes, together with all other expenses and charges, incurred by the
Company or the Deferred Compensation Account in the sale or liquidation of
each investment shall be charged directly to the Participant's Deferred
Compensation Account.
Funds shall be held in the Deferred Compensation Account until the earlier
of (i) the date designated for payment by the Participant in the deferral
election or (ii) the date described in Section (D) or (E) below (the
"Distribution Date") as follows:
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A. The Deferred Compensation Account of each Participant shall be
divided into a series of sub-accounts, one for each Year of Service for
which the Participant has a deferral election in effect under the Program.
Each sub-account shall become payable at the time designated by the
Participant in the deferral election filed with respect to the Compensation
credited to that sub-account.
B. Each sub-account of a Participant shall be paid in the quarter
following the last day of the Year of Service or one, two, three, four or
five years following the last day of the Year of Service for which the
Compensation was payable, in accordance with the deferral election filed by
the Participant.
C. The Participant may not subsequently revoke or modify his/her
designation of a distribution date for a particular sub-account.
D. Should a Participant die at a time when there still exists a
balance in his/her Deferred Compensation Account, then the total amount of
such account shall become immediately due and payable.
E. Should the Participant cease Board service following a Change in
Control or Corporate Transaction, then the entire balance credited to
his/her Deferred Compensation Account shall become immediately due and
payable, notwithstanding any outstanding election or elections of the
Participant to the contrary under the Program.
Other than described above, a Participant shall have no right to
receive any of the funds in the Deferred Compensation Account. Until the
Distribution Date, all funds in the Deferred Compensation Account shall be
assets of the Company, subject to the claims of general creditors of the
Company.
Each sub-account which becomes due and payable in accordance with
paragraph B, D or E above shall be distributed in one lump sum payment. Lump sum
disbursements shall be made by the Company as soon as commercially reasonable
after the Distribution Date, but in no event later than the end of the first
calendar quarter following the Distribution Date.
All disbursements made under the Program to Participants shall be
subject to the Company's withholding of any Federal, State or local income and
employment taxes, to the extent Federal, State or local law requires withholding
of taxes with respect to participants, and all such payments shall be net of
such tax withholding.
The obligation to pay the deferred compensation and the investment
return (if any) thereon shall at all times be an unfunded and unsecured
obligation of the Company. The Participant's interest in the Deferred
Compensation Account shall remain unvested until the Distribution Date.
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V. GENERAL PROVISIONS
The Program shall become effective as of January 1, 1994. The Board
may at any time thereafter amend, suspend or terminate the Program; PROVIDED,
however, that such action shall not adversely affect rights previously vested
and non-forfeitable under the Program.
Each Participant shall receive a calendar year-end statement of the
balance credited to each of his/her sub-accounts under the Program. Such
statement shall be provided to each Participant within ninety (90) days after
the close of each calendar year.
The Company shall pay all routine and on-going internal administrative
costs incurred in connection with the operation of the Program.
The Participant shall have no right to alienate, pledge or encumber
his/her interest in the amounts credited to his/her Deferred Compensation
Account, and such account shall not, to the extent permitted by law, be subject
to any claims of the Participant's creditors or to attachment, execution or
other process of law.
Any balance credited to the Participant's Deferred Compensation
Account at the time of his/her death shall be paid to the Participant's
designated beneficiary or, in the absence of such designation, in accordance
with the Participant's will or the laws of descent and distribution. A
Participant may from time to time revoke his/her beneficiary designation then in
effect and file a new beneficiary designation with the Committee. All
beneficiary designations, however, must be on the form prescribed by the
Committee.
Neither the action of the Company in establishing the Program, nor any
action taken by the Committee under the Program, nor any provision of the
Program itself, shall be construed so as to impair the Company's right to remove
any Participant from service on the Board any time in accordance with the
provisions of applicable law.
The obligation of the Company to make the payments required hereunder
shall be binding upon any successor or assign of the Company, whether by
merger, consolidation, acquisition or other reorganization. No amendment or
termination of the Program by the Company (or any successor or assignee) shall
adversely affect or other wise impair the rights of Participants to receive the
balance credited to their Deferred Compensation Accounts hereunder, to the
extent attributable to deferral elections made prior to the date of such
amendment or termination.
6
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE DIRECTORS COMPENSATION DEFERRAL ELECTION PROGRAM
DESIGNATION OF BENEFICIARY
I hereby designate either the trust or other entity specified in Part A below or
the individual or individuals specified in Part B below as the beneficiary or
beneficiaries of all my right, title and interest in and to my Deferred
Compensation Account under the Deferral Election Program, hereby revoking any
prior designation of beneficiaries made by me:
PART A DESIGNATION
The following trust or other entity is hereby designated as my sole beneficiary:
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
PART B DESIGNATION
The following individual or individuals are hereby designated as my
beneficiaries:
NAME ADDRESS RELATIONSHIP % OF TOTAL
1.
--------------- --------------- ------------------ --------------
2.
--------------- --------------- ------------------ --------------
3.
--------------- --------------- ------------------ --------------
The designated individual must survive me; otherwise, his/her designated
share is to be divided equally among the beneficiaries who do survive me. If no
beneficiaries survive me, the account balance is to be paid to my estate.
Printed Name:
--------------------------------
Signature:
--------------------------------
Date:
--------------------------------
7
<PAGE>
Network Equipment Technologies, Inc.
Corporate Directors Compensation Deferral Election Program
1996 Deferral Form
I hereby elect to participate in the Network Equipment Technologies, Inc.'s
Corporate Directors Compensation Deferral Election Program ("Program") for the
calendar year set forth above and to defer payment of ____% of the compensation
to which I may become entitled during the 1996 calendar year. I hereby elect to
have all deferred amounts initially invested in the account(s) checked below:
_____ Investment Fund _____ Other Securities
_____ Stock _____ Certificate of Deposit
Please give investment description/fund name:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The deferred amounts, together with earned interest or capital gains (or
losses) shall become due and payable in one lump sum at the time checked below:
/ / Jan. 1, 1997 / / Jan. 1, 1998 / / Jan. 1, 1999 / / Jan. 1, 2000
/ / Jan. 1, 2001 / / Jan. 1, 2002
Arrange to have duplicate statements mailed to my / / home or / / work
address.
In the event I should die while any amount deferred hereunder remains
unpaid, that amount plus the investment return thereon shall become immediately
due and payable in one lump sum.
As required by the Federal tax laws, each of the foregoing elections and
the time of payment for the deferred amount is irrevocable and cannot be changed
or modified under any circumstances. I understand that the Program document is
controlling and that in the event my status as an director ceases following a
Change in Control or Corporate Transaction, all amounts deferred by me under the
Program will be paid to me in an immediate lump sum.
I acknowledge and agree that this election is irrevocable and that
compensation deferred by me under the program is payable to me only under the
terms set out in the program document.
Printed Name:
------------------------------
Signature:
------------------------------
Dated:
------------------------------
8
<PAGE>
EXHIBIT 10.17
EXHIBIT A TO OCTOBER 18, 1995 N.E.T. BOARD RESOLUTION
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE OFFICERS COMPENSATION DEFERRAL ELECTION PROGRAM
I. PURPOSE OF THE PROGRAM
This Corporate Officers Compensation Deferral Election Program
("Program") is intended to promote the interests of Network Equipment
Technologies, Inc., a Delaware corporation (the "Company"), by providing
Corporate Officers of the Company with the opportunity to participate in a
deferred compensation arrangement which will allow them to tailor the receipt of
their compensation to their own personal needs and thereby encourage them to
continue in the service of the Company.
II. ADMINISTRATION OF THE PROGRAM
The Program shall be administered by the Compensation Committee
("Committee") of the Company's Board of Directors (the "Board") and, consistent
with applicable law and the Company's By-laws, a Corporate Officer may be
designated to take all action and to execute and deliver all documents which
such officer may deem necessary or appropriate to carry out this Program. The
Committee shall have full authority to administer the Program, including the
authority to interpret and construe the provisions of the Program and to adopt
rules and regulations for administering the Program. Decisions of the Committee
shall be final and binding on all parties who have an interest in the Program.
For purposes of administration and interpretation, the following
definitions shall apply:
CHANGE IN - A change in Control shall be deemed to occur:
CONTROL
(i) on the first date that a person or related
group of persons, other than the Company or a
person that directly or indirectly controls, is
controlled by or is under common control with the
Company, acquire ownership of twenty-five percent
(25%) or more of the Company's outstanding voting
stock pursuant to a tender or exchange offer
which the Board does not recommend that the
shareholders of the Company accept; or
(ii) on the first date within any period of
twenty-four (24) consecutive months or less on
which there is effected a change in the
composition of the Board such that a majority of
the Board members (rounded
<PAGE>
up to the next whole number) ceases to be
comprised of individuals who either (A) have been
members of the Board continuously since the
beginning of such period or (B) have been elected
or nominated for election as Board members during
such period by at least a majority of the Board
members described in clause (A) who were still in
office at the time such election or nomination
was approved by the Board.
CORPORATE
OFFICER - An officer is an employee of the Company, who is
appointed by the Company's Board of Directors to
a position of Corporate Officer pursuant to
Article V, Section 1 of the Company's By-laws.
CORPORATE A Corporate Transaction shall be deemed to
TRANSACTION - occur in the event there is:
(i) a merger or consolidation of the Company in
which the Company is not the surviving entity,
except for a transaction the principal purpose of
which is to change the State of the Company's
incorporation,
(ii) the sale, transfer or other disposition of
all or substantially all of the assets of the
Company in liquidation or dissolution of the
Company, or
(iii) any reverse merger in which the Company is
the surviving entity but in which securities
possessing more than fifty percent (50%) of the
combined voting power of the Company's
outstanding securities are transferred to holders
different from those who held such securities
immediately prior to such merger.
EFFECTIVE
DATE - January 1, 1996.
PARTICIPANT - A Corporate Officer of the Company, who has been
designated as a Participant by the Committee and
who elects to participate in the Corporate
Officers Deferral Election Program.
COMPENSATION - The compensation payable to each Corporate
Officer determined by the Committee to be
eligible for participation under this Program,
including base salary and incentive, but
excluding reimbursable expenses under applicable
Company policies.
2
<PAGE>
DEFERRED
COMPENSATION
ACCOUNT - An investment account reflecting Compensation
deferred by a Participant, which may (at the
Company's discretion) be established at a bank,
brokerage or similar financial institution for
the sole purpose of holding and investing
Compensation that has been deferred by the
Participant.
SUBSIDIARY - Each corporation (other than the Company) in an
unbroken chain of corporations ending with the
Company, provided such corporation (other than
the last corporation in the chain) owns, at the
time of determination, stock possessing fifty
percent (50%) or more of the total combined
voting power of all the classes of stock in one
of the other corporations in such chain.
YEAR OF
SERVICE - Any calendar year during which a Participant
renders services as a Corporate Officer of the
Company.
III. ELIGIBILITY;
DEFERRED COMPENSATION ELECTION
Only Corporate Officers designated as Participants by the
Committee will be eligible to participate in the program. Participants shall
remain eligible to defer Compensation pursuant to this Program until the
EARLIEST to occur of (i) of the Participants termination of employment service
or (ii) the termination of the Program.
Each Participant shall have the right to make an annual election
to defer the receipt of up to one hundred percent (100%) of the Participant's
Compensation earned by him/her for any Year of Service for which he/she is a
Participant in the Program. Any Compensation so deferred shall be paid in
accordance with the provisions of the Program.
Each deferral election shall be made in compliance with all of the
following requirements and shall not be effective unless such requirements are
met:
A. The election must be exercised by means of a written notice
to the Committee. The notice shall be in such form as the Committee
deems appropriate and must be delivered to the Committee or its designee
prior to the commencement date of the Year of Service for which the
compensation is to be earned.
B. The amount deferred with respect to any Year of Service
must be made in increments of ten percent (10%).
3
<PAGE>
C. The election, once made, shall be irrevocable with respect
to the Year of Service for which it is made.
IV. DEFERRED COMPENSATION ACCOUNT
PAYMENT OF DEFERRED COMPENSATION
The Company shall establish a Deferred Compensation Account for
each Participant who properly exercises a deferral election under the Program.
Any Compensation deferred by a Participant shall be credited to his/her Deferred
Compensation Account biweekly (or at other scheduled pay days) as of the date
such Compensation would have otherwise become payable in the absence of the
Participant's deferral election.
The balance credited to each Deferred Compensation Account shall
earn an investment return over the deferral period in accordance with the
following provisions:
A. The Committee may in its discretion provide Participants
with the right to designate the particular investment funds or specific
stocks, securities or certificates of deposit. To the extent such
investment authority is provided, the following special guidelines shall
be in effect:
(i) The Participant must file investment directives with
respect to his/her account balance in increments of twenty-five percent
(25%), but in any event in increments of no less than $5,000.
(ii) Investment directives may be filed at intervals no
more frequently than quarterly, and each investment directive shall
remain in effect for at least one full calendar quarter and may not be
changed at intervals more frequently than quarterly.
(iii) To the extent the Company invests assets of the
Company (which shall be held as general assets) in the specific
investments designated by the Participant, all expenses and charges
incurred by the Company or the Deferred Compensation Account in the
acquisition of each investment (including, without limitation, the
purchase price and any brokerage fees, commission or other front-end
charges) and all income and other taxes, together with all other expenses
and charges, incurred by the Company or the Deferred Compensation Account
in the sale or liquidation of each investment shall be charged directly
to the Participant's Deferred Compensation Account.
Funds shall be held in the Deferred Compensation Account until the
earlier of (i) the date designated for payment by the Participant in the
deferral election or (ii) the date described in Section (D) or (E) below (the
"Distribution Date") as follows:
A. The Deferred Compensation Account of each Participant shall
be divided into a series of sub-accounts, one for each Year of Service
for which the
4
<PAGE>
Participant has a deferral election in effect under the Program. Each
sub-account shall become payable at the time designated by the
Participant in the deferral election filed with respect to the
Compensation credited to that sub-account.
B. Each sub-account of a Participant shall be paid in the
quarter following the last day of the Year of Service or one, two, three,
four or five years following the last day of the Year of Service for
which the Compensation was payable, in accordance with the deferral
election filed by the Participant.
C. The Participant may not subsequently revoke or modify
his/her designation of a distribution date for a particular sub-account.
D. Should a Participant die at a time when there still exists
a balance in his/her Deferred Compensation Account, then the total amount
of such account shall become immediately due and payable.
E. Should the Participant cease employment following a Change
in Control or Corporate Transaction, then the entire balance credited to
his/her Deferred Compensation Account shall become immediately due and
payable, notwithstanding any outstanding election or elections of the
Participant to the contrary under the Program.
Other than described above, a Participant shall have no right to
receive any of the funds in the Deferred Compensation Account. Until the
Distribution Date, all funds in the Deferred Compensation Account shall be
assets of the Company, subject to the claims of general creditors of the
Company.
Each sub-account which becomes due and payable in accordance with
paragraph B, D or E above shall be distributed in one lump sum payment. Lump sum
disbursements shall be made by the Company as soon as commercially reasonable
after the Distribution Date, but in no event later than the end of the first
calendar quarter following the Distribution Date.
All disbursements made under the Program to Participants shall be
subject to the Company's withholding of any Federal, State or local income and
employment taxes, to the extent Federal, State or local law requires withholding
of taxes with respect to employees , and all such payments shall be net of such
tax withholding.
The obligation to pay the deferred compensation and the investment
return (if any) thereon shall at all times be an unfunded and unsecured
obligation of the Company. The Participant's interest in the Deferred
Compensation Account shall remain unvested until the Distribution Date.
V. GENERAL PROVISIONS
The Program shall become effective as of January 1, 1996. The
Board may at any time thereafter amend, suspend or terminate the Program;
PROVIDED, however,
5
<PAGE>
that such action shall not adversely affect rights previously vested and
non-forfeitable under the Program.
Each Participant shall receive a calendar year-end statement of
the balance credited to each of his/her sub-accounts under the Program. Such
statement shall be provided to each Participant within ninety (90) days after
the close of each calendar year.
The Company shall pay all routine and on-going internal
administrative costs incurred in connection with the operation of the Program.
The Participant shall have no right to alienate, pledge or
encumber his/her interest in the amounts credited to his/her Deferred
Compensation Account, and such account shall not, to the extent permitted by
law, be subject to any claims of the Participant's creditors or to attachment,
execution or other process of law.
Any balance credited to the Participant's Deferred Compensation
Account at the time of his/her death shall be paid to the Participant's
designated beneficiary or, in the absence of such designation, in accordance
with the Participant's will or the laws of descent and distribution. A
Participant may from time to time revoke his/her beneficiary designation then in
effect and file a new beneficiary designation with the Committee. All
beneficiary designations, however, must be on the form prescribed by the
Committee.
Neither the action of the Company in establishing the Program, nor
any action taken by the Committee under the Program, nor any provision of the
Program itself, shall be construed so as to impair the Company's right to remove
any Participant from Corporate Officer status or to terminate their employment
at any time.
The obligation of the Company to make the payments required
hereunder shall be binding upon any successor or assign of the Company, whether
by merger, consolidation, acquisition or other reorganization. No amendment or
termination of the Program by the Company (or any successor or assignee) shall
adversely affect or other wise impair the rights of Participants to receive the
balance credited to their Deferred Compensation Accounts hereunder, to the
extent attributable to deferral elections made prior to the date of such
amendment or termination.
6
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE OFFICER COMPENSATION DEFERRAL ELECTION PROGRAM
DESIGNATION OF BENEFICIARY
I hereby designate either the trust or other entity specified in Part A below or
the individual or individuals specified in Part B below as the beneficiary or
beneficiaries of all my right, title and interest in and to my Deferred
Compensation Account under the Deferral Election Program, hereby revoking any
prior designation of beneficiaries made by me:
PART A DESIGNATION
The following trust or other entity is hereby designated as my sole beneficiary:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
PART B DESIGNATION
The following individual or individuals are hereby designated as my
beneficiaries:
NAME ADDRESS RELATIONSHIP % OF TOTAL
---- ------- ------------ ----------
1. ---------- --------------- -------------------- -------------
2. ---------- --------------- -------------------- -------------
3. ---------- --------------- -------------------- -------------
The designated individual must survive me; otherwise, his/her designated
share is to be divided equally among the beneficiaries who do survive me. If no
beneficiaries survive me, the account balance is to be paid to my estate.
Printed Name:
------------------
Signature:
------------------
Date:
------------------
7
<PAGE>
Network Equipment Technologies, Inc.
Corporate Officer Compensation Deferral Election Program
1996 Deferral Form
I hereby elect to participate in the Network Equipment Technologies, Inc.'s
Corporate Officer Compensation Deferral Election Program ("Program") for the
calendar year set forth above and to defer payment of ____% of the compensation
to which I may become entitled during the 1996 calendar year. I hereby elect to
have all deferred amounts initially invested in the account(s) checked below:
Investment Fund Other Securities
- ------ ------
Stock Certificate of Deposit
- ------ ------
Please give investment description/fund name:
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The deferred amounts, together with earned interest or capital gains (or losses)
shall become due and payable in one lump sum at the time checked below:
/ / Jan. 1, 1997 / / Jan. 1, 1998 / / Jan. 1, 1999 / / Jan. 1, 2000
/ / Jan. 1, 2001 / / Jan. 1, 2002
Arrange to have duplicate statements mailed to my / / home or / / work address.
In the event I should die while any amount deferred hereunder remains unpaid,
that amount plus the investment return thereon shall become immediately due and
payable in one lump sum.
As required by the Federal tax laws, each of the foregoing elections and the
time of payment for the deferred amount is irrevocable and cannot be changed or
modified under any circumstances. I understand that the Program document is
controlling and that in the event my employment or my status as an officer is
terminated following a Change in Control or Corporate Transaction, all amounts
deferred by me under the Program will be paid to me in an immediate lump sum.
I acknowledge and agree that this election is irrevocable and that compensation
deferred by me under the program is payable to me only under the terms set out
in the program document.
Printed Name:
------------------
Signature:
------------------
Date:
------------------
8
<PAGE>
EXHIBIT 10.18
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE OFFICERS LONG TERM VARIABLE
COMPENSATION PROGRAM
I. PURPOSE OF THE PROGRAM
This Corporate Officers Long Term Variable Compensation Program
("Program") is intended to promote the interests of Network Equipment
Technologies, Inc., a Delaware corporation (the "Company"). This Program
provides Corporate Officers of the Company with the opportunity to receive long
term variable compensation once vesting events occur in accordance with the
written terms of this Program, thereby encouraging them to contribute to the
long term success and to remain in the service of the Company. This Program
will be administered in conjunction with the Company's Variable Compensation
Program. Participants will have no right to receive any compensation or
consideration under or related to this Program except to the extend that a
Vesting Event or Accelerated Vesting Event occurs.
II. ADMINISTRATION OF THE PROGRAM
This Program shall be administered by the Compensation Committee
("Committee") of the Company's Board of Directors (the "Board") and, consistent
with applicable law and the Company's By-laws, a Corporate Officer may be
designated by the Committee to take all action and to execute and deliver all
documents which such Officer may deem necessary or appropriate to carry out this
Program. The Committee shall have full authority to administer the Program,
including the authority to interpret and construe the provisions of the Program
and to adopt rules for administering the Program. Decisions of the Committee
shall be final and binding on all parties who have an interest in the Program.
For purposes of administration and interpretation, the following
definitions shall apply:
CHANGE IN - A Change in Control shall be deemed to occur:
CONTROL
(i) on the first date that a person or related
group of persons, other than the Company or a
person that directly or indirectly controls, is
controlled by or is under common control with the
Company, acquire ownership of twenty-five percent
(25%) or more of the Company's outstanding voting
stock pursuant to a tender or exchange offer
which the Board does not recommend that the
shareholders of the Company accept; or
<PAGE>
(ii) on the first date within any period of
twenty-four (24) consecutive months or less on
which there is effected a change in the
composition of the Board such that a majority of
the Board members (rounded up to the next whole
number) ceases to be comprised of individuals who
either (A) have been members of the Board
continuously since the beginning of such period
or (B) have been elected or nominated for
election as Board members during such period by
at least a majority of the Board members
described in clause (A) who were still in office
at the time such election or nomination was
approved by the Board.
CORPORATE
OFFICER - An officer is an employee of the Company who is
appointed by the Company's Board of Directors to
a position of Corporate Officer pursuant to
Article V, Section 1 of the Company's By-laws
("Officer").
CORPORATE A Corporate Transaction shall be deemed to
TRANSACTION - occur in the event there is:
(i) a merger or consolidation of the Company in
which the Company is not the surviving entity,
except for a transaction the principal purpose of
which is to change the State of the Company's
incorporation,
(ii) the sale, transfer or other disposition of
all or substantially all of the assets of the
Company in liquidation or dissolution of the
Company, or
(iii) any reverse merger in which the Company is
the surviving entity but in which securities
possessing more than fifty percent (50%) of the
combined voting power of the Company's
outstanding securities are transferred to holders
different from those who held such securities
immediately prior to such merger.
DETERMINATION AND PAYMENT OF LONG
TERM VARIABLE
COMPENSATION - Once each fiscal year the CEO of the Company
shall recommend and, subject to approval by the
Committee, a separate amount of up to 50% of the
amount received by a Corporate Officer under the
Company's Variable Compensation Program in that
2
<PAGE>
year shall be identified in the Committee's
records as Long Term Variable Compensation that
such Participant shall in the future receive,
subject to occurrence of a Vesting Event or
Accelerated Vesting Event. Payment of such
amounts shall be made in increments of 25%
following the occurrence of a Vesting Event over
the next succeeding four years (no interest shall
accrue or be paid on any such amounts). Provided,
however, that upon the occurrence of an
Accelerated Vesting Event, all such amounts shall
be promptly paid to the Participant.
PARTICIPANT - An Officer of the Company, who has been
designated as a Participant by the Committee and
who is a full-time employee of the Company or one
of its subsidiaries. Except as provided in the
Program document or as otherwise determined in
writing by the Committee, a Participant shall
cease to be a Participant and shall have no
ability or right to receive amounts that are not
vested under this Program coincident with the
termination of that person's full-time employment
by the Company or one of its subsidiaries.
SUBSIDIARY - Each corporation (other than the Company) in an
unbroken chain of corporations ending with the
Company, provided such corporation (other than
the last corporation in the chain) owns, at the
time of determination, stock possessing fifty
percent (50%) or more of the total combined
voting power of all the classes of stock in one
of the other corporations in such chain.
VESTING EVENT - Unless otherwise provided in writing by the
Committee, a Vesting Event shall occur annually
on the last day of the Company's fiscal year for
Participants who are employed full-time by the
Company or its subsidiaries.
ACCELERATED
VESTING EVENT - Should a Participant die or become permanently
disabled or cease employment by the Company or
its successor or assign following a Change in
Control or Corporate Transaction or should this
Program be discontinued by a successor in
interest or assignee, then the all amounts
identified by the Committee as
3
<PAGE>
potential Long Term Variable Compensation for
such Participant shall become immediately due and
payable.
III. ELIGIBILITY
Only Officers designated as Participants by the Committee will be
eligible to participate in this Program.
Participants shall have no right to receipt of any consideration
or compensation under (or related to) this Program prior to the occurrence of a
Vesting Event or Accelerated Vesting Event and except as expressly provided in
writing herein or by the Committee.
IV. VESTING AND PAYMENT
The occurrence of a Vesting Event or Accelerated Vesting Event for
a Participant shall trigger an obligation for the Company to make a Payment of
Long Term Variable Compensation to that Participant.
Other than described above, a Participant shall have no right to
receive any of the funds under or related to this Program.
Each vested amount which becomes due and payable in accordance
with the provisions of this Program shall be distributed in one lump sum
payment. Lump sum disbursements shall be made by the Company as soon as
commercially reasonable after vesting.
All disbursements made under this Program to Participants shall
be subject to the Company's withholding of any Federal, State or local income
and employment taxes, to the extent Federal, State or local law requires
withholding of taxes with respect to employees, and all such payments shall be
net of such tax withholding.
The Company and its Officers, Directors, employees, attorneys and
agents shall have no obligation to pay any amounts under this Program except as
expressly provided in writing under this Program. No Officer or individual
Director of the Company shall have the right or power to create any such
obligation or to modify the provisions of this Program. Participants shall have
no right, title or interest in Company assets until a Vesting Date or
Accelerated Vesting Date occurs as provided herein.
V. GENERAL PROVISIONS
The Program is effective beginning in fiscal 1996. The Committee
may at any time amend or terminate the Program. However, such action shall not
affect any amounts identified as Long Term Variable Compensation pursuant to
Article II "Determination and Payment of Long Term Variable Compensation" prior
to any such
4
<PAGE>
action, which amounts shall continue to vest and be payable upon the occurrence
of what would have been Vesting Events or Accelerated Vesting Events had the
Program not been amended or terminated.
The Participant shall have no right to alienate, pledge or
encumber his/her interest in any amounts identified by the Committee as
potential Long Term Variable Compensation.
Provided all other eligibility conditions exist at that time of a
Participant's death, all vested amounts, including amounts vested as a result of
that Accelerated Vesting Event, shall be paid to the Participant's designated
beneficiary or, in the absence of such designation, to the Participant's estate.
Neither the action of the Company in establishing the Program, nor
any action taken by the Committee under the Program, nor any provision of the
Program itself, shall be construed so as to impair the Company's right to remove
any Participant from Corporate Officer status or to modify the terms of their
employment or compensation or to terminate their employment at any time.
The obligation of the Company to make the payments required
hereunder shall be binding upon any successor or assign of the Company, whether
by merger, consolidation, acquisition or other reorganization. No amendment or
termination of the Program by the Company (or any successor or assignee) shall
adversely affect or otherwise impair the rights of Participants to receive
vested amounts.
0o0
5
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
CORPORATE OFFICER LONG TERM VARIABLE COMPENSATION PROGRAM
DESIGNATION OF BENEFICIARY
I hereby designate either the individual or individuals specified in Part A
below or the trust or other entity specified in Part B below as the beneficiary
or beneficiaries of all my right, title and interest in any Vested Long Term
Variable Compensation under the N.E.T. Long Term Variable Compensation Program.
I hereby revoke any prior designation of beneficiaries made by me:
PART A DESIGNATION
The following individual or individuals are hereby designated as my
beneficiaries:
NAME ADDRESS RELATIONSHIP % OF TOTAL
---- ------- ------------ ----------
1. ---------- --------------- -------------------- -------------
2. ---------- --------------- -------------------- -------------
3. ---------- --------------- -------------------- -------------
The designated individual(s) must survive me; otherwise, his/her designated
share is to be divided equally among the beneficiaries who do survive me. If no
beneficiaries survive me, vested amounts are to be paid to my estate.
PART B DESIGNATION
The following trust or other entity is hereby designated as my sole beneficiary:
----------------------------------------------------------------
----------------------------------------------------------------
This Beneficiary Designation was completed and signed by:
Participant's
Printed Name:
-----------------------------------
Signature:
--------------------------------------
Date:
--------------------------------------
6
<PAGE>
EXHIBIT 11.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Primary
Earnings:
Net income (loss).......................................................... $ (6,324) $ 27,070 $ 31,350
--------- --------- ---------
--------- --------- ---------
Shares:
Weighted average number of common shares outstanding....................... 16,778 17,735 19,825
Weighted average options using the treasury stock method................... -- 1,033 1,008
--------- --------- ---------
16,778 18,768 20,833
--------- --------- ---------
--------- --------- ---------
Primary income (loss) per share.............................................. $ (.38) $ 1.44 $ 1.50
--------- --------- ---------
--------- --------- ---------
Fully Diluted
Earnings:
Net income (loss).......................................................... $ (6,324) $ 27,070 $ 31,350
--------- --------- ---------
--------- --------- ---------
Shares:
Weighted average number of common shares outstanding....................... 16,778 17,735 19,825
Weighted average options using the treasury stock method................... -- 2,059 1,083
Number of common equivalent shares assuming conversion of convertible
securities (1)............................................................ -- -- --
--------- --------- ---------
16,778 19,794 20,908
--------- --------- ---------
--------- --------- ---------
Fully diluted income (loss) per share.......................................... $ (.38) $ 1.37 $ 1.50
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) The assumed exercise of these common stock equivalents was excluded as it
was anti-dilutive or had no material impact on the earnings per share
calculation.
<PAGE>
Exhibit 12.1
(Front Cover)
N.E.T. Logo
"N.E.T. Value - 1996 Annual Report"
<PAGE>
CORPORATE OVERVIEW
N.E.T. supplies wide-area networks (WANS) to enterprises and carriers around the
world. These organizations manage vast amounts of critical information and
require reliable, cost-effective networking solutions.
Most of these organizations also need a combination of voice, video, and data
capabilities -- which the N.E.T. -TM- multiservice backbone network provides. A
network constructed of N.E.T. multiservice bandwidth managers frees our
customers from being locked into a single technology or application. It gives
them the flexibility to customize a network so that it meets their unique needs
and allows them to add technologies and applications as required.
For more information on N.E.T. join us at our world wide web site at
http://www.net.com
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
HIGHLIGHTS FOR YEARS ENDED MARCH 31, 1996 1995
- --------------------------------------------------------------------------------
Revenue $ 338,899 $ 284,036
Operating income 47,408 25,970
Net income 31,350 27,070
Primary earnings per share 1.50 1.44
Working capital 174,425 128,683
Total assets 281,957 232,046
7 1/4% convertible subordinated debentures 33,526 68,625
Stockholders' equity 184,430 101,662
Number of employees 1,318 1,189
- --------------------------------------------------------------------------------
Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax
benefit, primary earnings per share would have been $.91.
(Dollars in thousands, except per share amounts)
1996 HIGHLIGHTS BY QUARTER FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771
Net income 6,422 7,448 8,215 9,265
Primary and fully diluted earnings
per share .32 .36 .39 .43
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 12.1
Three graphs are displayed showing quarterly Revenue (dollars in millions), Net
Income (dollars in millions, excluding a $9.9 million tax benefit in Q4 FY95),
and Primary Earnings Per Share (dollars, excluding a $9.9 million tax benefit in
Q4 FY95).
<PAGE>
TO OUR SHAREHOLDERS
N.E.T.'s outstanding year can be attributed in part to excellent teamwork: an
attitude infused throughout the organization. Along with responsible stewardship
of resources, it has enabled us to consolidate our position in the fast-moving
telecommunications industry.
STRENGTHENING YOUR COMPANY . . . OUR GOALS FOR FISCAL 96
We began this year with clear company objectives - to continue to increase both
revenue and profitability while further strengthening your company across the
board.
Another year of record results
Our financial results are evidence that we achieved the first objective,
increasing revenue and profitability. Revenue for the year was $339 million, up
almost 20% from the previous year, and reached an all-time high of over $91
million in the fourth quarter. Operating income grew 83% to over $47 million.
Net income for the year was $31 million, or $1.50 per share. Our record
operating results were complemented by an equivalent strengthening of the
balance sheet - cash resources grew by over $25 million to $112 million, and
long-term debt was reduced by more than 50 percent to less than $34 million.
Overall company performance
Our improvement and results as a dedicated team go deeper than financial
highlights can reveal. We achieved the second objective - to strengthen your
company - through well-executed initiatives throughout the organization. Some of
these activities include . . .
Sales and marketing
We continued to reallocate and direct our sales and marketing teams to achieve a
greater share of the international, carrier, and government marketplaces -
growth areas for the best-of-class products that N.E.T. is delivering today. In
fact, our performance and excellent financial results this year are based on the
worldwide competitive success of our Multiservice Bandwidth Managers. Obviously,
as a trusted vendor to many world-class organizations, our loyal customer base
is a key strength. We are determined to keep on earning this trust, delivering
the right products and services through appropriate channels.
Business relationships
During the year we announced our Vista architecture, describing how N.E.T.
networks can grow to support broadband network needs for the future. A key
element designed into this architecture is the ability to integrate
complementary, best-of-class products with our own internally developed
products. Consequently, we initiated or strengthened several key business
partnerships this year. Our objective is to be able to provide more complete
solutions - matching a comprehensive product portfolio, greater than any single
vendor can offer, with our world-class service and support capabilities.
Engineering . . . and Reengineering
Our internal engineering capabilities have improved significantly over the past
year. We have increased both the size and the quality of our engineering staff,
and made aggressive capital investments to enhance our overall development
environment. We are investing in major new developments in ATM and network
management and enhancements to our Multiservice Bandwidth Managers. Other
initiatives such as the ISO 9000 program, begun several years ago and aimed at
raising our product-related activities to unparalleled standards, have resulted
in greater efficiencies and predictability of our product operations, as well as
greatly enhanced product quality.
PREPARING FOR GROWTH . . . OUR GOALS FOR FISCAL 97
As we move ahead through FY97, our objective is to prepare the company for
faster growth as the market for the new broadband technologies hits stride. The
initiatives we took in FY96 to strengthen the company for the long-term will be
reinforced this year with even greater zeal. For example, we will deepen our
reengineering efforts for further improvements in business processes and
practices. Increased operational efficiencies will be achieved through the
closer integration of our engineering
<PAGE>
and manufacturing teams to reduce product costs; and, at the same time, we are
combining our field sales and service teams to make us more efficient in
handling the needs of our customers. Also in this fiscal year, results of major
engineering developments are planned for announcement and availability.
Our understanding of the markets in which we operate and our core technology
competencies come together in N.E.T.'s Vista architecture - providing network
solutions for today and tomorrow. You'll learn more about this in the pages that
follow.
Our business is bringing value in an industry beset with choices and change. Our
value is in blending trust with best-of-class products and services, thus
enhancing our customers' ability to deal with the relentless change in
telecommunications and in their business environments.
Sincerely,
Joseph J. Francesconi
President and Chief Executive Officer
<PAGE>
MARKETS
Wide-area networking around the world
Market Strategy
Global Focus
N.E.T. has selected key segments of the wide-area networking market to provide
the company with a broad range of regional and global opportunities. Our success
is in supplying and bringing value to four main market segments while balancing
their distinct requirements.
U.S. Commercial
Customers value our total network solutions, trusting us to deliver products and
services for their heartbeat networks. We are continuing to enhance that value
by adding service overlays - such as ISDN, frame relay, and internetworking -
for our prestigious installed base. In an ever-changing telecommunications
environment, our flexible multiservice platforms allow enterprises to leverage
their network alternatives: choosing private or public elements as required, and
switching between them easily.
U.S. Federal
As a supplier of highly reliable wide-area networking solutions, N.E.T. has
earned the respect of the federal government. We have grown a highly successful
Department of Defense (DoD) business, and the DoD depends on our staff to add
extra value through systems integration. Opportunities abound for N.E.T. to
serve the needs of civilian agencies and international allies.
Carriers
Carrier consortia need highly flexible platforms as a foundation for global
managed network services. N.E.T. continues to be a leading vendor for those
global carriers, proving that our Multiservice Bandwidth Manager is the right
solution for today's applications. The company also provides highly reliable
systems to cellular network operators domestically and has begun to extend this
business internationally.
International
The deregulation of telecommunications markets around the world is driving the
need for flexible network solutions, offering tremendous opportunities for
N.E.T. to capitalize on the strengths of our Multiservice Bandwidth Manager.
Carriers in many countries are increasing their investment in network
infrastructure. They require leading-edge capabilities to satisfy today's
increasingly demanding network customers. Internationally, N.E.T. has focused
both on large enterprises and regional carriers, supplying backbones for several
large digital data networks (DDNs).
<PAGE>
TECHNOLOGIES
Managing bandwidth for circuits, frames, packets, and cells
Technology Strategy
Multiservice
N.E.T.'s technology strategy grows from our firm belief in the benefits of
multiservice backbone networks. Our success stems from the value customers place
on our approach. "Multiservice" means that a single network or system supports
multiple applications with multiple technologies - using the most appropriate
technology for each application. For example, N.E.T.'s Multiservice Bandwidth
Manager integrates packet switching (such as frame relay and routing) and
time-division multiplexing (TDM). Key benefits include minimal equipment, ease
of management, economies of bandwidth aggregation, and service flexibility. The
overall result: a high-value, low-cost solution.
Complementary technologies
By design, every technology is optimized for certain speeds and types of traffic
and is less efficient for others. TDM, which supports a full range of speeds, is
optimized for speeds up to T1/E1 and for constant traffic, especially voice.
Similarly, most packet traffic uses narrowband technologies optimized for bursty
traffic at speeds up to T1/E1. The combination of TDM and packet technologies in
N.E.T.'s Multiservice Bandwidth Manager offers an extremely powerful solution
for narrowband multiservice networks. Narrowband technologies represent more
than 90 percent of today's communications facilities and will hold this lead
position well into the next century.
Broadband ATM
A small but increasing proportion of applications need large and variable
amounts of bandwidth. This is where ATM will prove most effective. ATM is a
broadband technology optimized for speeds greater than T1/E1 and designed to
carry multiservice traffic. It is an important emerging technology being
introduced mainly for multimedia or to build backbones for packet or frame
traffic.
Technology strategy
N.E.T. will offer broadband and narrowband support in a single multiservice
network through the use of ATM, TDM, and packet technologies. N.E.T.'s Vista
architecture, the framework for implementation of this strategy, is described on
pages 8 and 9. Key elements are our ATM switch, Multiservice Bandwidth Manager,
and ATM Service Interfaces, united by network management.
<PAGE>
VISTA
The true multiservice network architecture
Vista Architecture
Systems view
N.E.T.'s Vista is a true multiservice network architecture for the wide area. It
comprises products and services for data and voice networking: it encompasses
narrow and broadband applications, leveraging packet and circuit technologies,
for carriers and enterprises. N.E.T.'s Vista architecture differs from
competitive ATM product strategies: our systems view includes an ATM switch
element, but does not stop there!
ATM switching core
At the heart of the Vista architecture is N.E.T.'s multiservice ATM switch. This
highly scalable, standards-based core will offer the availability carriers
demand and enterprises are coming to expect. It will support broadband
applications directly and interwork with N.E.T.'s Multiservice Bandwidth Manager
to support narrowband applications. This facilitates the evolution of our
multiservice backbones to incorporate ATM capabilities.
Best-of-class products
Vista uses open standard interfaces to connect architectural elements. Devices
known as ATM Service Interfaces (ASIs) connect to the ATM switch core to support
legacy applications over the ATM backbone. The Multiservice Bandwidth Manager,
edge router, and frame ASIs are three classes of devices that provide specific
adaptation and aggregation functions. The real power of this ASI concept is that
it gives N.E.T.'s network designers freedom to select from several best-of-class
products. This simplifies the integration of partner products while providing
flexibility in Vista network design. Further benefits stem from the "loosely
coupled" nature of the Vista architecture - which enables individual elements to
be upgraded quickly and simply. For example, the ATM switch component in a
system could be upgraded to take advantage of the rapid rate of change in ATM
implementation technology, without requiring changes to the ASIs surrounding it.
United with NMS
The Vista network management system (NMS) will oversee N.E.T. and partner
products, providing the support that carriers require for their network
applications. It will present a standards-based view of the Vista network and
will have tightly integrating characteristics to complement our loosely coupled
network architecture.
<PAGE>
STRATEGY
Adding value for customers and shareholders
Company Strategy
Global market focus
Global entities select N.E.T. for our flexibility and reliability: large
enterprises trust us to equip and support their private heartbeat networks;
global carrier partners trust us to provide the best managed platforms. We are
directing our efforts to increase our penetration of carrier and international
markets while continuing to be a leader in enterprise networking.
Wide-area network focus
In line with the long-term trend towards broadband networking, we are expanding
our strategic core competencies by developing wide- area ATM products for our
Vista architecture. N.E.T.'s powerful distributed intelligence will maximize
bandwidth efficiencies for both data and voice across the full range of
switching technologies, including ATM.
World-class services and support
N.E.T. is renowned for its superior service organization. Our well-known
strengths in technical assistance, installation, and maintenance are enhanced by
our more recent successes with systems integration and project management. We
plan to further expand our professional services to leverage our expertise in
designing, planning, and operating networks around the world.
Value to customers
Within our Vista architecture, several well-considered design goals - such as
the loose-coupling of elements to enable change and the key expanding role for
our Multiservice Bandwidth Manager - allow our network solutions to be deployed
to meet current customer requirements while offering a path to leading-edge
capabilities in the future. Also, Vista anticipates a wide range of ASIs and
leverages our partnerships with industry leaders for best-of-class products. As
a result, the breadth of interfaces and network services offered by N.E.T. is
expansive.
Value to shareholders
Company objectives have been defined to strengthen the company long-term. Over
time, we believe that the achievement of this goal will yield increasing
shareholder value. Recognizing that our employees - some of whom are featured
throughout these pages - are key to the company's success, we are investing
heavily in their training and development. We will continue our reengineering
initiatives to maximize organizational efficiencies while striving to fulfill
customer requirements better than ever before.
"Fiscal 96 was a year of strong revenue and income growth. It was also a year
in which we made significant investments in research and development and capital
equipment to position the company for future growth." Craig M. Gentner, Senior
Vice President and Chief Financial Officer.
<PAGE>
EXHIBIT 12.1
Eight graphs are displayed for each quarter Fiscal 1995 and 1996 showing: 1)
Product Revenue (dollars in millions; product revenue increased 17% over fiscal
year 1995); 2) Operating Income (dollars in millions; compared to fiscal year
1995, income from operations grew 83%); 3) R & D Spending (dollars in millions);
4) Capital Expenditures (dollars in millions); 5) Primary Earnings Per Share
(dollars; compared to fiscal year 1995 (excluding a Q4 FY95 tax benefit),
primary earnings per share grew 65%); 6) Cash & Investments (dollars in
millions; the Company continued to generate cash from operations); 7) Debt to
Equity (ratio; debt was reduced more than 50% by completing a partial call of
the convertible subordinated debentures); 8) Stockholders' Equity (dollars in
millions; stockholders' equity increased 81% from March 1995).
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL QUARTER 1996
Revenue $ 79,609 $ 82,958 $ 84,561 $ 91,771
Gross margin 38,722 41,566 43,671 47,202
Net income 6,422 7,448 8,215 9,265
Primary and fully diluted earnings per share .32 .36 .39 .43
- -----------------------------------------------------------------------------------------
FISCAL QUARTER 1995
Revenue $ 61,538 $ 66,851 $ 73,839 $ 81,808
Gross margin 30,081 32,404 38,175 40,956
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
- -----------------------------------------------------------------------------------------
</TABLE>
Results for the fourth quarter of fiscal 1995 include a $9.9 million tax
benefit. Excluding this tax benefit, primary and fully diluted earnings per
share would have been $.38. See Note 11 to the Consolidated Financial
Statements.
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
YEARS ENDED MARCH 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 338,899 $ 284,036 $ 237,672 $ 218,846 $ 180,805
Net income (loss) 31,350 27,070 (6,324) (11,097) (11,213)
Primary earnings (loss) per share 1.50 1.44 (.38) (.71) (.76)
7 1/4% convertible
subordinated debentures 33,526 68,625 68,625 68,625 68,625
Other long-term obligations - - - 52 1,212
Total assets 281,957 232,046 187,015 186,596 178,605
- -----------------------------------------------------------------------------------------------
</TABLE>
Results for fiscal 1995 include a $9.9 million tax benefit. Excluding this tax
benefit, primary earnings per share would have been $.91. See Note 11 to the
Consolidated Financial Statements.
<PAGE>
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 are discussed in more detail below and
include, among others: advances and 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; ability to develop and deliver new
products; customer acceptance of existing and new products; 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, 1996.
Percent of Revenue 1996 1995 1994
---- ---- ----
Product revenue 66.7 67.9 69.8
Service and other revenue 33.3 32.1 30.2
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
----- ----- -----
Gross margin product revenue 59.9 58.9 56.2
Gross margin service and
other revenue 31.6 30.7 31.4
----- ----- -----
Total gross margin 50.5 49.9 48.7
----- ----- -----
----- ----- -----
Sales and marketing 22.2 24.8 29.9
Research and development 10.8 12.0 14.2
General and administrative 3.5 4.0 5.6
----- ----- -----
Total operating expenses 36.5 40.8 49.7
----- ----- -----
----- ----- -----
Income (loss) from operations 14.0 9.1 (1.0)
Interest income 1.8 0.9 0.6
Interest expense (1.4) (1.8) (2.2)
Other (0.2) 0.0 (0.1)
----- ----- -----
Income (loss) before income taxes 14.2 8.2 (2.7)
Income tax (provision) benefit (4.9) 1.3 0.0
----- ----- -----
Net income (loss) 9.3 9.5 (2.7)
----- ----- -----
----- ----- -----
COMPARISON OF 1996 AND 1995
REVENUE
Total revenue in fiscal 1996 increased $54.9 million, or 19.3% from fiscal 1995.
Product revenue and service and other revenue increased $33.2 million and $21.7
million, respectively, for the year. The 17.2% increase in product revenue is
principally due to increased IDNX -Registered Trademark- product
<PAGE>
sales across all sales channels. Over one-half of this increase is attributable
to the U.S. federal channel. Total product sales in the U.S. federal channel,
which includes U.S. government sales and sales to U.S. government contractors,
increased 38.3% to 27.4% of product revenue. International product sales
increased 11.4% to 34.1% of product revenue, primarily due to growth in the
European region. Growth in other product lines includes a 13.6% year-over-year
increase in STM -TM- product sales and incremental revenues earned in fiscal
1996 on sales of OEM equipment sold under recent marketing alliances.
Service and other revenue increased 23.8% 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 growth in the
installed base of the Company's products.
Overall, revenue in the U.S. federal channel grew 37.4% over last year and
increased as a percentage of total revenue from 31.6% in fiscal 1995 to 36.4% in
fiscal 1996. Total international revenue increased 15.2% over last year and in
fiscal 1996 represented 27.1% of the Company's total revenue as compared to
28.1% in fiscal 1995.
GROSS MARGIN
Total gross margin as a percentage of total revenue increased to 50.5% in fiscal
1996 from 49.9% in fiscal 1995. Product gross margin increased to 59.9% in
fiscal 1996 from 58.9% in fiscal 1995. The increase in fiscal 1996 was primarily
due to favorable manufacturing variances from higher production volumes.
Favorable sales channel and IDNX product mix in fiscal 1996 was partially offset
by lower margins on sales of OEM equipment.
The gross margin for service and other revenue increased to 31.6% in fiscal
1996 from 30.7% in fiscal 1995 as a result of improved margins on both service
and systems integration services provided under a U.S. government contract. The
gross margin on these systems integration services increased to 14.8% in fiscal
1996 from 11.5% in fiscal 1995 due to changes in 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, and expects
service and other revenue gross margin to continue to fluctuate as a result of
the changes in mix between systems integration services and other service
revenue.
OPERATING EXPENSES
Operating expenses increased $8.1 million in fiscal 1996. Operating expenses as
a percentage of total revenue decreased to 36.5% in fiscal 1996 from 40.8% in
fiscal 1995. Management expects operating expenses as a percentage of total
revenue to continue to trend downward in fiscal 1997 as planned revenue growth
exceeds that of operating expenses.
Sales and marketing expense increased $5.1 million in fiscal 1996 due to the
addition of personnel to support expansion of the sales infrastructure, and
commissions and travel expenses commensurate with the increase in sales volume
and the geographic dispersion thereof. Despite the increase in spending, sales
and marketing expense decreased as a percentage of total revenue to 22.2% in
fiscal 1996 from 24.8% in fiscal 1995. Management expects sales and marketing
expense to increase in fiscal 1997, while decreasing as a percentage of planned
revenue.
Research and development expense increased $2.5 million in fiscal 1996 due to an
increase in direct project funding, primarily salary-related expenses and
purchases of hardware and software tools to support product development. The
expense as a percentage of total revenue decreased to 10.8% in fiscal 1996 from
12.0% in fiscal 1995. In fiscal 1996, $1.9 million of software costs were
capitalized as compared to $2.0 million in fiscal 1995. Management plans to
continue funding research and development efforts at levels necessary to advance
product
<PAGE>
programs and expects research and development spending to increase in fiscal
1997, while remaining fairly constant as a percentage of planned revenue.
General and administrative expense increased $.5 million in fiscal 1996, but
decreased to 3.5% of total revenue as compared to 4.0% in fiscal 1995.
Management expects general and administrative expense to increase moderately in
fiscal 1997.
NON-OPERATING ITEMS
Interest income in fiscal 1996 increased $3.4 million from fiscal 1995 due to
higher cash balances and higher interest rates. Interest expense, primarily
related to the 7-1/4% convertible subordinated debentures, decreased $.5 million
to $4.7 million for fiscal 1996 compared to $5.2 million for fiscal 1995 as a
result of the partial call of the Company's convertible debentures. The
decrease consists of $1.0 million in interest savings offset by $.5 million of
one-time costs associated with the redemption. Other expense increased $.4
million in fiscal 1996 from $.1 million in fiscal 1995.
For the fiscal year ended March 31, 1996, the Company recorded income tax
expense of $16.9 million at an effective rate of 35% as compared to a tax
benefit of $3.8 million for fiscal 1995. 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"("SFAS
109"), the Company recorded a tax benefit in the fourth quarter of fiscal 1995
of $9.9 million. See Note 11 to the Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard defines a fair value method of
accounting for stock-based employee compensation plans. The Company plans to
adopt the disclosure-only alternative, and, accordingly, SFAS 123 will have no
impact on the Company's results of operations or financial position.
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, over the same period. The 16.3% increase in product
revenue was principally due to increased IDNX sales in the international and
U.S. federal channels. International product sales increased 52.9% to 35.9% of
product revenue in fiscal 1995. 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 increased 15.5% to 23.2% of product
revenue in fiscal 1995. STM sales increased 44.9% in fiscal 1995. Service and
other revenue increased 26.9% from fiscal 1994. This increase was attributable
to increases in systems integration services in support of product sales to the
U.S. government, and, to a lesser extent, to continued growth in the installed
base of the Company's products. Overall, international sales increased 52.7%
from fiscal 1994 and in fiscal 1995 represented 28.1% of the Company's total
revenue as compared to 22.0% in the prior year. Sales to the U.S. government
grew 19.7% from fiscal 1994 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
<PAGE>
fiscal 1994. Fiscal 1994'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 a change in the mix of OEM products
and services provided.
OPERATING EXPENSES
Operating expenses decreased $2.4 million in fiscal 1995 from the prior year.
Operating expenses as a percentage of total revenue decreased to 40.8% in fiscal
1995 from 49.7% in fiscal 1994. This decrease was the result of management's
continuing focus on cost control and increased operating efficiencies.
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.
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.
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.
NON-OPERATING ITEMS
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.
For the fiscal year ended March 31, 1995, the Company recorded an income tax
benefit of $3.8 million. As a result of the significant increase in
profitability during fiscal 1995 and in accordance with SFAS 109, the Company
recorded a tax benefit in the fourth quarter of fiscal 1995 of $9.9 million.
Due to the net loss in fiscal 1994, no income taxes were provided. See Note 11
to the Consolidated Financial Statements.
BUSINESS ENVIRONMENT AND RISK FACTORS
When used in this annual report, including Management's Discussion and Analysis,
the President's letter to shareholders and elsewhere, the words "believes,"
"anticipates," "future," "expects," "will" and similar words identify
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties. Actual results may differ materially from such
forward-looking statements as a result of risks and uncertainties, including
those
<PAGE>
described below and others as set forth in the Company's periodic reports filed
with the Securities and Exchange Commission.
Historically, the majority of the Company s revenue 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 derive from making
judgments on issues such as future technology trends, competitive products and
services, pricing 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 and many are susceptible to
changing regulations and political conditions. The Company has limited
visibility into factors that could influence its revenue, mix of product and
other revenue sources and margins, particularly in international markets that
are served primarily by non-exclusive resellers.
The Company's products incorporate intellectual property and technology owned by
the Company or licensed from third parties. The Company's ability to maintain
and enhance the value of its intellectual property and technology and third
party licenses will affect future product and service offerings. Moreover, the
Company believes that operating results will depend on successful development
and introduction of new products and enhancements to existing products and
service offerings. There can be no assurance that the Company will succeed in
such efforts or that customers will accept new, enhanced and existing products
and services in quantities and at prices an margins that are consistent with the
Company's expectations. The Company's success also depends on its ability to
attract and retain employees necessary to support planned growth.
The Company's products include components, assemblies and subassemblies that are
currently available from single sources and, in some cases, are in short supply.
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.
The Company has distribution, product and technology relationships with a number
of significant customers and entities that are considered by the Company to be
strategic. Most of the Company's competitors have similar relationships with
their respective customers and other parties. Changes in the Company's
relationships or changes in similar relationships among competitors could have a
material impact on competitive and other factors described above, including the
Company's operating results. Also, litigation or other claims based on
securities, intellectual property, patent, product, regulatory or other factors
could materially adversely affect the Company's business, operating results and
finances.
A significant portion of the Company's revenue comes from contracts with the
U.S. government, most of which do not include purchase commitments. There can
be no assurance that orders from the U.S. government, or from other customers,
will continue at historical levels, or that the Company will be able to obtain
orders from new customers.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash, cash equivalents and temporary cash
investments of $112.2 million, as compared to $86.6 million at the end of fiscal
1995. Cash provided from operations was $40.2 million in fiscal 1996, a $3.2
million decrease over the prior year. This decrease was principally due to an
increase in accounts receivable partially offset by an increase in accrued
liabilities. Accounts receivable increased $20.8 million during fiscal 1996
due to the increase in sales volume, particularly in the last month of the
fiscal year.
Net cash used for investing activities in fiscal 1996 consisted primarily of
purchases of property and equipment of $17.2 million, which increased $8.9
million from fiscal 1995, most significantly for the purchase of R&D equipment.
Cash used for investing activities also included net purchases of temporary cash
investments of $7.2 million and additions to software production costs of $1.9
million.
Net cash provided by financing activities in fiscal 1996 is composed of $12.7
million from the issuance of Common Stock relating to the employee stock benefit
plans, partially offset by $10.1 million used to redeem a portion of the
Company's 7 1/4% convertible subordinated debentures.
In the third quarter of fiscal 1996, the Company completed a partial call of its
outstanding 7 1/4% convertible subordinated debentures due May 15, 2014,
reducing long-term debt by $35.1 million to $33.5 million. To redeem a portion
of the debentures, $10.1 million in cash was used, $.3 million of which
represents the premium paid in excess of principal. An additional $25.3 million
of principal was converted into 802,078 shares of Common Stock at a conversion
price of $31.50 per share.
As of March 31, 1996, the Company had available an unsecured $10.0 million line
of credit. Borrowings under this committed borrowing facility are available
through May 1997 and bear interest at the bank's base rate (which approximates
prime). At March 31, 1996, 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 1997.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 52,319 $ 33,886
Temporary cash investments 59,892 52,734
Accounts receivable, net of allowances of $4,533 in 1996
and $2,514 in 1995 76,966 56,983
Inventories 31,705 32,314
Deferred income taxes 11,830 9,900
Prepaid expenses and other assets 5,714 4,625
- -----------------------------------------------------------------------------------
Total current assets 238,426 190,442
- -----------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment 92,653 98,969
Furniture and fixtures 5,874 6,863
Leasehold improvements 10,290 10,241
Construction in progress 438 1,694
- -----------------------------------------------------------------------------------
109,255 117,767
Less accumulated depreciation and amortization (78,215) (90,618)
- -----------------------------------------------------------------------------------
Property and equipment, net 31,040 27,149
Software production costs, net 4,146 4,691
Other assets 8,345 9,764
- -----------------------------------------------------------------------------------
$ 281,957 $ 232,046
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 21,559 $ 18,315
Accrued liabilities 42,442 43,444
- -----------------------------------------------------------------------------------
Total current liabilities 64,001 61,759
- -----------------------------------------------------------------------------------
7 1/4% convertible subordinated debentures 33,526 68,625
Stockholders' equity:
Preferred Stock, $.01 par value
Authorized: 5,000,000 shares
Outstanding: none - -
Common Stock to be issued - 32
Common Stock, $.01 par value
Authorized: 50,000,000 shares
Outstanding: 20,839,000 shares in 1996 and 18,714,000
shares in 1995 208 187
Additional paid-in capital 165,414 113,846
Net unrealized loss on available-for-sale securities (12) (10)
Accumulated translation adjustment (931) (794)
Retained earnings (deficit) 19,751 (11,599)
- -----------------------------------------------------------------------------------
Total stockholders' equity 184,430 101,662
- -----------------------------------------------------------------------------------
$ 281,957 $ 232,046
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Years Ended March 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product revenue $ 226,070 $ 192,901 $ 165,842
Service and other revenue 112,829 91,135 71,830
- --------------------------------------------------------------------------------------
Total revenue 338,899 284,036 237,672
- --------------------------------------------------------------------------------------
Cost of sales:
Cost of product revenue 90,588 79,227 72,647
Cost of service and other revenue 77,150 63,193 49,277
- --------------------------------------------------------------------------------------
Total cost of sales 167,738 142,420 121,924
- --------------------------------------------------------------------------------------
Gross margin 171,161 141,616 115,748
- --------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 75,432 70,348 71,064
Research and development 36,437 33,923 33,736
General and administrative 11,884 11,375 13,229
- --------------------------------------------------------------------------------------
Total operating expenses 123,753 115,646 118,029
- --------------------------------------------------------------------------------------
Income (loss) from operations 47,408 25,970 (2,281)
Interest income 6,044 2,626 1,411
Interest expense (4,713) (5,213) (5,276)
Other (508) (73) (178)
- --------------------------------------------------------------------------------------
Income (loss) before income taxes 48,231 23,310 (6,324)
Income tax (provision) benefit (16,881) 3,760 -
- --------------------------------------------------------------------------------------
Net income (loss) $ 31,350 $ 27,070 $ (6,324)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Net income (loss) per share:
Primary $ 1.50 $ 1.44 $ (.38)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Fully diluted $ 1.50 $ 1.37 $ (.38)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Shares used in per share computation:
Primary 20,833 18,768 16,778
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Fully diluted 20,908 19,794 16,778
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 33,886 $ 23,854 $ 30,080
- ----------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income (loss) 31,350 27,070 (6,324)
Adjustments required to reconcile net income (loss)
to cash provided by operations:
Depreciation and amortization 15,481 17,591 19,469
Writedown of ATMX inventory and assets - - 3,764
Restricted stock compensation 368 10 391
Deferred income taxes (1,930) (9,900) -
Changes in assets and liabilities:
Accounts receivable (20,839) 2,077 (7,042)
Inventories 506 2,280 (12,293)
Prepaid expenses and other assets (1,185) (621) (81)
Accounts payable 3,356 (2,092) 4,621
Accrued liabilities 13,099 6,941 (351)
- ----------------------------------------------------------------------------------------------
Net cash provided by operations 40,206 43,356 2,154
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of temporary cash investments (85,960) (60,816) (30,414)
Proceeds from maturities of temporary cash investments 78,800 25,786 34,722
Purchases of property and equipment (17,165) (8,258) (14,273)
Additions to software production costs (1,875) (1,968) (2,681)
Other 955 903 1,728
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (25,245) (44,353) (10,918)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of Common Stock 12,684 12,583 4,179
Repurchase of convertible subordinated debentures (10,117) - -
Purchase of Common Stock - - (600)
Repayments of borrowings - (26) (1,074)
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,567 12,557 2,505
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 905 (1,528) 33
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 18,433 10,032 (6,226)
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 52,319 $ 33,886 $ 23,854
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Other cash flow information:
Cash paid during the year for:
Interest $ 4,136 $ 5,213 $ 5,276
Income taxes $ 5,496 $ 2,061 $ 65
Non-cash investing and financing activities:
Conversion of convertible subordinated debentures
into Common Stock (including accrued interest
and debenture offering costs) $ 25,532 $ - $ -
Income tax benefit arising from employee stock
option plans $ 12,972 $ 2,718 $ 111
Net unrealized loss on available-for-sale securities $ 2 $ 10 $ -
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Common Gain (Loss) on
Stock Additional Available- Accumulated Retained
To Be Common Paid-In For-Sale Translation Earnings
(Dollars in thousands) Issued Stock Capital Securities Adjustment (Deficit)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 SFAS 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)
- -------------------------------------------------------------------------------------------------------------------------------
Sale of 1,314,000 shares of Common
Stock under employee stock benefit plans - 13 13,040 - - -
Conversion of convertible subordinated
debentures into 802,078 shares of
Common Stock, including accrued interest
and offering costs - 8 25,524 - - -
Stock issued in connection with merger (32) - 32 - - -
Income tax benefit arising from
employee stock option plans - - 12,972 - - -
Net unrealized loss on securities - - - (2) - -
Accumulated translation adjustment - - - - (137) -
Net income - - - - - 31,350
- -------------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1996 $ - $ 208 $ 165,414 $ (12) $ (931) $ 19,751
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Network Equipment Technologies, Inc. ("N.E.T." or "the Company"), headquartered
in Redwood City, California, is a leading designer, developer, manufacturer and
supplier of multiservice backbone networks and associated services used by
enterprises and carriers worldwide.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned 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 systems
integration, installation and training, is recognized when the service is
performed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
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 original maturities of greater than three months at the time of
acquisition.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market and
include material, labor and manufacturing overhead costs. Inventories at March
31 consisted of the following:
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------
Purchased components $ 14,381 $ 11,498
Work-in-process 15,533 17,175
Finished goods 1,791 3,641
- ----------------------------------------------------------------
$ 31,705 $ 32,314
- ----------------------------------------------------------------
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.
<PAGE>
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 $1.9 million, $2.0 million and $2.7 million in
fiscal 1996, 1995 and 1994, respectively. Software production costs are
amortized over the lives of the products, generally three years. Amortization
amounted to $2.4 million, $2.8 million and $3.3 million in fiscal 1996, 1995 and
1994, respectively. During fiscal 1996, the Company reduced fully amortized
software production costs by 19.4 million, which had no effect on net balances.
Accumulated amortization was $3.8 million and $20.8 million at March 31, 1996
and 1995, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for the CompanyOs foreign subsidiaries is the local
currency. Assets and liabilities of foreign subsidiaries are translated into
dollars at the rates of exchange in effect at the end of the period. Revenues
and expenses are translated at the average exchange rate during the period.
Gains and losses from foreign currency translation are included in a separate
account in stockholders' equity in the Consolidated Balance Sheets. Foreign
currency transaction gains or losses are included in the Consolidated Statements
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, 1996, the
Company had outstanding foreign exchange contracts of $5.0 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.
SIGNIFICANT RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
management estimates include the allowance for doubtful accounts receivable, the
valuation of inventory, the valuation allowance on deferred tax assets and
certain reserves and accruals. Actual results could differ from those
estimates.
The Company sells its products primarily to large organizations 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
<PAGE>
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.
The Company participates in a very dynamic high technology telecommunications
industry and believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position or results of
operations: advances and trends in new technologies; competitive pressures in
the form of new products or price reductions on current products; changes in
product mix; changes in the overall demand for products and services offered by
the Company; changes in certain strategic partnerships or customer
relationships; litigation or claims against the Company based on securities,
intellectual property, patent, product, regulatory or other factors; risks
associated with changes in domestic and international economic and/or political
conditions or regulations; availability of necessary components; and the
Company's ability to attract and retain employees necessary to support its
growth.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard defines a fair value method of
accounting for stock-based employee compensation plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period. This standard
will be effective for the Company beginning in fiscal 1997 and requires
measurement of awards made throughout fiscal 1996. The Company will adopt the
disclosure-only alternative, and, accordingly, SFAS 123 will have no impact on
the Company's results of operations or financial position.
NOTE 2: TEMPORARY CASH INVESTMENTS
The Company classifies 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.
Temporary cash investments at March 31 consisted of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 36,495 $ 17 $ 35 $ 36,477
Commercial paper and banker's
acceptances 2,986 - 1 2,985
Certificates of deposit 6,000 - 1 5,999
Foreign debt issues 11,430 6 8 11,428
U.S. government and municipalities 3,000 3 - 3,003
$ 59,911 $ 26 $ 45 $ 59,892
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 22,839 $ 40 $ 40 $ 22,839
Commercial paper and banker's
acceptances 9,208 5 10 9,203
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
Equity securities 2,000 - - 2,000
- ------------------------------------------------------------------------------------
$ 52,750 $ 62 $ 78 $ 52,734
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
At March 31, 1996, all available-for-sale securities mature within thirteen
months. Any gains or losses on sales of securities are computed on a specific
identification basis. There were no realized gains or losses from the sale of
securities in fiscal years 1996, 1995 and 1994.
NOTE 3: SIGNIFICANT CUSTOMERS
Sales to the U.S. government and its agencies amounted to 34%, 28% and 28% of
revenue for fiscal years 1996, 1995 and 1994, respectively. These amounts
include sales, which amounted to 30%, 19% and 20% of revenue for fiscal years
1996, 1995 and 1994, respectively, under a contract with the Department of
Defense under which various government agencies can order products, installation
and service from the Company. The Company had one other customer that accounted
for 11% of sales in fiscal 1994 and no other customer accounted for more than
10% in fiscal 1996 and 1995.
NOTE 4: SEGMENT INFORMATION
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1996
Sales to unaffiliated customers $ 286,842 $ 52,057 $ - $ 338,899
Sales to foreign affiliates 21,409 4,316 (25,725) -
Total revenue $ 308,251 $ 56,373 $ (25,725) $ 338,899
Operating income $ 43,607 $ 2,560 $ 1,241 $ 47,408
Identifiable assets at year end $ 283,453 $ 27,801 $ (29,297) $ 281,957
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
</TABLE>
<PAGE>
Sales to foreign affiliates represent products which are transferred on a basis
intended to approximate arms-length prices as negotiated by unrelated entities.
Domestic sales to unaffiliated customers include $39.9 million, $32.3 million
and $22.0 million of export sales in fiscal years 1996, 1995 and 1994,
respectively.
NOTE 5: ACCRUED LIABILITIES
Accrued liabilities at March 31 were as follows:
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------
Accrued compensation $ 18,585 $ 19,512
Unearned income 6,082 7,272
Other 17,775 16,660
- -----------------------------------------------------------------
$ 42,442 $ 43,444
- -----------------------------------------------------------------
- -----------------------------------------------------------------
NOTE 6: FINANCING ARRANGEMENTS
The Company maintains an unsecured $10.0 million line of credit. Borrowings
under this committed facility are available through May 1997 and 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, 1996. There were no outstanding borrowings under the line of credit
agreement at March 31, 1996.
NOTE 7: LEASE COMMITMENTS
The Company leases its facilities under operating leases. The minimum future
lease commitments under these leases as of March 31, 1996, were as follows:
(Dollars in thousands)
- ----------------------------------------------------------------
1997 $ 7,005
1998 6,337
1999 4,110
2000 1,681
2001 1,243
After 2001 3,380
- ----------------------------------------------------------------
$23,756
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Rental expense under operating leases was $7.2 million, $6.4 million and $6.9
million for fiscal years 1996, 1995 and 1994, respectively.
NOTE 8: 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 102.175% of face value
on May 15, 1996, 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
<PAGE>
debentures prior to maturity. Such required sinking fund payments will be
reduced by any redemption or conversion of debentures prior to the date of the
sinking fund payment.
In the third quarter of fiscal 1996, the Company completed a partial call of its
outstanding 7 1/4% convertible subordinated debentures, reducing long-term debt
by $35.1 million to $33.5 million. To redeem the debentures, $10.1 million in
cash was used, $.3 million of which represents the premium paid in excess of
principal. An additional $25.3 million of principal was converted into 802,078
shares of Common Stock at a conversion price of $31.50 per share.
NOTE 9: CAPITAL STOCK
The Company's Board of Directors has approved a plan to protect stockholders'
rights in the event of a proposed takeover of the Company. Under the plan, as
amended in June 1990, a preferred share purchase right ("Right") is attached to
each share of Common Stock. The Rights are exercisable only after a person or
group acquires beneficial ownership of 15% or more of the Company's Common Stock
or commences a tender or exchange offer that would result in 20% or more of
Common Stock ownership. Each Right initially entitles stockholders to buy one
one-hundredth of a share of a new series of participating Preferred Stock at an
exercise price of $120. If the Company is acquired in a merger or other
transaction with a person or group, or sells 50% or more of its assets or
earning power to such a person or group, each Right not owned by such acquiring
person will entitle its holder to obtain on exercise of the Right a number of
the acquiring company's common shares having a market value at the time of twice
the Right's then-current exercise price. If a person or group acquires 15% or
more of the Company's outstanding Common Stock, each Right will entitle its
holder to obtain on exercise of the Right a number of shares of Common Stock (or
equivalent) having a market value of twice the Right's then-current exercise
price. After a person or group has acquired 15% of the outstanding shares of
Common Stock but before their acquisition of 50% or more of the Common Stock,
the Board of Directors may exchange one share of Common Stock or equivalent
fractions of Preferred Stock for each Right. The Company can redeem the Rights
at $.01 per Right at any time until the tenth day following the acquisition by a
person or group of 15% of the Company's Common Stock. The Rights are also
redeemable thereafter in certain circumstances. The Rights expire on August 24,
1999, unless earlier redeemed or exchanged.
As of March 31, 1996, the Company had reserved shares of its Common Stock for
the following purposes:
Reserved
- -----------------------------------------------------------------
Stock option plans:
Outstanding (at $5.25 to $40.50 per share) 2,634,688
Available for grant 1,964,171
Convertible subordinated debentures 1,064,317
Employee Stock Purchase Plan 441,069
- -----------------------------------------------------------------
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, 1996, 230,500
shares at $.01 per share have been awarded and issued under the Plan. As of
March 31, 1996, the Company had the right to repurchase 60,500 shares from
certain officers at the original purchase price. Such right expires ratably
<PAGE>
over the respective vesting periods. Related compensation expense totaled $368
thousand, $10 thousand and $391 thousand for the years ended March 31, 1996,
1995 and 1994, 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, 1996, no preferred shares
were outstanding.
NOTE 10: 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:
Shares Option Prices
- ------------------------------------------------------------------------------
Options outstanding at March 31, 1993 3,644,506
Granted 1,579,450 $ 6.00 - $10.63
Exercised (364,468) 6.75 - 11.00
Canceled (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
Canceled (465,028) 5.75 - 26.33
---------
Options outstanding at March 31, 1995 3,012,462
Granted 996,066 21.50 - 40.50
Exercised (1,114,819) 4.00 - 29.88
Canceled (259,021) 6.63 - 40.50
---------
Options outstanding at March 31, 1996 2,634,688 $ 5.25 - $40.50
--------- ----------------
--------- ----------------
- ------------------------------------------------------------------------------
On March 31, 1996, options for 1,080,002 shares were exercisable at prices
ranging from $5.25 to $27.38 per share.
NOTE 11: INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which prescribes an asset and liability method of
income tax accounting.
Income (loss) before income taxes and the provision (benefit) for income taxes
consist of the following:
<PAGE>
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------
Income (loss) before income taxes:
Domestic $ 46,674 $ 20,563 $ (2,333)
Foreign 1,557 2,747 (3,991)
- -------------------------------------------------------------------------
$ 48,231 $ 23,310 $ (6,324)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Provision (benefit) for income taxes:
Current:
Federal $ 16,595 $ 6,140 $ -
State 2,216 - -
Foreign - - -
- -------------------------------------------------------------------------
18,811 6,140 -
- -------------------------------------------------------------------------
Deferred:
Federal (1,643) (8,227) -
State (287) (1,673) -
Foreign - - -
- -------------------------------------------------------------------------
(1,930) (9,900) -
- -------------------------------------------------------------------------
$ 16,881 $ (3,760) $ -
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The provision (benefit) for income taxes reconciles to the amount
computed by applying the statutory U.S. federal rate of 35% to
income (loss) before income taxes as follows:
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
Statutory federal tax provision (benefit) $ 16,881 $ 8,159 $ (2,150)
State taxes net of federal income tax benefit 1,929 1,399 (126)
Change in valuation allowance (3,504) (14,341) 1,671
Other 1,575 1,023 605
- -----------------------------------------------------------------------------
Provision (benefit) for income taxes $ 16,881 $ (3,760) $ -
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following
at March 31:
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------
Reserves not currently deductible for tax purposes $ 7,866 $ 8,670
Depreciation 942 2,403
Loss carryforwards 1,159 1,664
Credit carryforwards 6,431 5,458
- -------------------------------------------------------------------------
Gross deferred tax assets 16,398 18,195
Gross deferred tax liabilities--
Capitalized software production costs (3,409) (3,632)
Valuation allowance (1,159) (4,663)
- -------------------------------------------------------------------------
Net deferred tax assets $ 11,830 $ 9,900
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The valuation allowance decreased $3.5 million in fiscal 1996 due to the
realization of the benefit of certain tax loss and credit carryforwards. A
valuation allowance of $1.2 million remains at March 31, 1996, and is
attributable to foreign loss carryforwards. 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
was more likely than not that it would 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
<PAGE>
reduction in the valuation allowance for fiscal 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.
As of March 31, 1996, the Company has available federal research tax credit
carryforwards of $2.8 million, expiring in 2006 through 2011, alternative
minimum tax credit carryforwards of $2.3 million available indefinitely and
state tax credit carryforwards of $1.3 million. Foreign tax loss carryforwards
of $3.3 million are available for use in reducing future taxable income in
certain foreign jurisdictions.
The Company's federal income tax returns for certain prior years are under
examination by the Internal Revenue Service ("IRS"). Certain adjustments
previously proposed by the IRS which related substantially to the timing (years)
of tax deductions have been resolved in the Company's favor. In the opinion of
management, any adjustments that may result from the ultimate resolution of any
remaining matters will not have a material effect on the Company's financial
condition or results of operations.
NOTE 12: 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 $1.0 million, $846 thousand and $750
thousand for fiscal 1996, 1995 and 1994, respectively.
NOTE 13: FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at March 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 52,319 $ 52,319 $ 33,886 $ 33,886
Temporary cash investments $ 59,892 $ 59,892 $ 52,734 $ 52,734
Liabilities
Foreign exchange contracts $ 4,969 $ 4,924 $ 13,052 $ 13,399
Convertible subordinated debentures $ 33,526 $ 36,669 $ 68,625 $ 60,304
- ----------------------------------------------------------------------------------------
</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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF 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, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 31, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
(signature)
DELOITTE & TOUCHE LLP
San Jose, California
April 15, 1996
<PAGE>
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.
Fiscal 1996 High Low
- ----------------------------------------------------------------
First quarter $25.25 $19.75
Second quarter 39.75 22.38
Third quarter 42.00 27.75
Fourth quarter 36.00 21.00
- ----------------------------------------------------------------
Fiscal 1995 High Low
- ----------------------------------------------------------------
First quarter $10.00 $ 7.38
Second quarter 14.88 8.25
Third quarter 24.00 12.50
Fourth quarter 27.88 22.38
- ----------------------------------------------------------------
In addition, the Company's 7 1/4% convertible subordinated debentures trade in
the over-the-counter market.
<PAGE>
CORPORATE DIRECTORY
CORPORATE OFFICERS
Joseph J. Francesconi
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Roger A. Barney
VICE PRESIDENT,
HUMAN RESOURCES AND CORPORATE SERVICES
Jerry L. Davis
VICE PRESIDENT, CLIENT SUPPORT
James B. De Golia
VICE PRESIDENT, GENERAL COUNSEL
AND ASSISTANT SECRETARY
Samuel H. Ezekiel
VICE PRESIDENT, MARKETING
J. Robert Forkish
VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER
Craig M. Gentner
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND CORPORATE SECRETARY
David P. Owen
VICE PRESIDENT,
CORPORATE DEVELOPMENT AND STRATEGY
Raymond E. Peverell
SENIOR VICE PRESIDENT, SALES AND SUPPORT
G. Michael Schumacher
SENIOR VICE PRESIDENT,
ENGINEERING AND OPERATIONS
Charles S. Shiverick
VICE PRESIDENT,
INFORMATION SERVICES AND REENGINEERING
DIRECTORS
John B. Arnold
CHAIRMAN OF THE BOARD, N.E.T.
Dixon R. Doll
INDEPENDENT VENTURE CAPITALIST,
CHAIRMAN OF THE DMW GROUP
James K. Dutton
DIRECTOR, CAERE CORPORATION AND
ECCS, INC.
<PAGE>
Joseph J. Francesconi
PRESIDENT AND CHIEF EXECUTIVE OFFICER, N.E.T.
Walter J. Gill
VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER (RETIRED), N.E.T.
Frank S. Vigilante
SENIOR VICE PRESIDENT (RETIRED), AT&T
Hans A. Wolf
VICE CHAIRMAN OF THE BOARD (RETIRED), SYNTEX CORPORATION
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m. on August 13,
1996, at the Company's headquarters in Redwood City, California.
INVESTOR RELATIONS
N.E.T. welcomes inquiries from its shareholders and other interested investors.
To receive the Company's Annual Report, Form 10-K, quarterly financial results
and other corporate information, please dial our hotline at 1-800-234-4-NET, or
write to Investor Relations at N.E.T., 800 Saginaw Drive, Redwood City, CA
94063, or visit our World Wide Web site.
N.E.T. ON THE INTERNET
N.E.T.'s home page on the World Wide Web contains background on the Company and
its products, financials, and other useful information. Our Web site is located
at http://www.net.com
TRANSFER AGENT
First National Bank of Boston
Boston, Massachusetts
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Jose, California
IDNX is a registered trademark, and N.E.T., the N.E.T. logo, and
STM are trademarks of Network Equipment Technologies, Inc.
- -C-1996 Network Equipment Technologies, Inc. All rights reserved.
<PAGE>
(Back Cover)
N.E.T. Logo
N.E.T., 800 Saginaw Drive, Redwood City, CA 94063 Tel 415.366.4400
Fax 415.366.5675
<PAGE>
EXHIBIT 21.1
NETWORK EQUIPMENT TECHNOLOGIES, INC.
SUBSIDIARIES OF REGISTRANT
AS OF JUNE 1, 1996
<TABLE>
<S> <C>
N.E.T. APLA, Inc. ..................... (State of Incorporation: Delaware)
N.E.T. China, Inc. .................... (Incorporated Under the Laws of China)
N.E.T. Credit Corporation.............. (State of Incorporation: California)
N.E.T. Europe GmbH..................... (Incorporated Under the Laws of Germany)
N.E.T. Europe Ltd. .................... (Incorporated Under the Laws of England)
N.E.T. Europe SA ...................... (Incorporated Under the Laws of France)
N.E.T. Federal, Inc. .................. (State of Incorporation: Delaware)
N.E.T. International, Inc. ............ (Incorporated Under the Laws of Barbados)
ComDesign International, Inc. ......... (Incorporated Under the Laws of U.S. Virgin
Islands)
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-33013, No. 33-33063, and No. 33-65157, and No. 33-68860 on Forms S-8 and
Registration Statement No. 33-45815 on Form S-3 of our reports dated April 15,
1996, appearing and incorporated by reference in this Annual Report on Form 10-K
of Network Equipment Technologies, Inc. for the year ended March 31, 1996.
DELOITTE & TOUCHE LLP
San Jose, California
June 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 52,319
<SECURITIES> 59,892
<RECEIVABLES> 76,966
<ALLOWANCES> 4,533
<INVENTORY> 31,705
<CURRENT-ASSETS> 238,426
<PP&E> 31,040
<DEPRECIATION> 78,215
<TOTAL-ASSETS> 281,957
<CURRENT-LIABILITIES> 64,001
<BONDS> 33,526
0
0
<COMMON> 208
<OTHER-SE> 184,222
<TOTAL-LIABILITY-AND-EQUITY> 281,957
<SALES> 226,070
<TOTAL-REVENUES> 338,899
<CGS> 90,588
<TOTAL-COSTS> 167,738
<OTHER-EXPENSES> 123,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,713
<INCOME-PRETAX> 48,231
<INCOME-TAX> 16,881
<INCOME-CONTINUING> 31,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,350
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
</TABLE>
